Business Analysis: Lloyd's under pressure as Bermuda exodus gathers pace

'Whatever anyone says, the main reason for moving is the tax regime'
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The Independent Online

Omega Underwriting became the latest Lloyd's of London insurer yesterday to announce it was upping sticks and relocating to Bermuda - following in the footsteps of its larger rivals Catlin (which led the charge seven years ago) and Hiscox (which declared it was moving last week).

With several other major underwriters known to be considering a similar move, including the likes of Wellington, London's Lloyd's market - once the centre of the insurance world - has been left feeling the heat.

Six months ago, after first revealing he was considering redomiciling his company to Bermuda, Hiscox's chairman, Robert Hiscox, sent a stark warning to the London market. Bermuda, he said, resembled "the Lloyd's of old in its entrepreneurial spirit, speed of reaction and swift sensible regulation". Lloyd's today, he added, was still as expensive and inefficient as it was 15 years ago - and should pull itself into the 21st century or risk withering away.

In the months since, Lloyd's has certainly attempted to rise to the challenge. Its chairman, Lord Levene, has admitted that the sight of underwriters lugging truckloads of paper files around the market is "ridiculous". And although the last attempt by Lloyd's to install an electronic trading system, Kinnect, famously imploded at the start of this year, the market is now working on other platforms, with a group of the largest underwriters - the so-called "G6" - driving reform across the board.

Meanwhile, Lloyd's has appointed a new chief executive. Richard Ward, the former head of the International Petroleum Exchange (IPE), joined in April, and in his short time at the market has impressed the industry with his appetite for modernisation.

But while Lloyd's may be catching up slowly, it has not prevented the recent trend of underwriters relocating and shifting their focus to Bermuda, begging the question: is its modernisation too little, too late?

Richard Tolliday, the chief executive of Omega, insists that redomiciling his company in Bermuda is not a snub to the London market. "The reasons behind our reorganisation are principally strategic and commercial," he said. "If you look at where our business comes from, 70 per cent of our income is in the US. So having our holding company in Bermuda makes sense."

Bronek Masojada, Hiscox's CEO, makes a similar claim, saying the development of its Bermuda base is "an 'as well as', not an 'instead of'". Lloyd's, he claims, is still as crucial to his company as it ever was.

Although proximity to the US is one excuse for moving to Bermuda, Gerald Farr, an analyst for Seymour Pierce, says neither this nor the inefficiencies of Lloyd's are the main reason.

"Whatever anyone says, the main reason is the tax regime in Bermuda - although it does also offer some additional distribution, and local brokerage rates are cheaper there as well," he says. Bermuda charges no corporation tax, compared to some 30 per cent in the UK, while its regulatory regime is considerably lighter touch as well.

Mr Farr, however, does not buy into the argument that Bermuda is growing at the expense of London, and Lloyd's in particular, pointing out London still has a number of advantages over Bermuda which will not be easily overcome. "The variety of business available on Bermuda at the moment is not that great - it tends to be focused on reinsurance of catastrophe risks emanating out of the US. Lloyd's offers much more.

"Also, if you look at the infrastructure, it's not clear whether Bermuda could cope with everyone moving there. New set-ups find it very hard to even find people to answer their phones, let alone professional staff."

The tax advantage remains a seductive factor, however. Simon Sperryn, the chief executive of the Lloyd's Market Association, concedes that this presents a real threat, adding that the Government has to keep London competitive if it is to retain its leading position in the global insurance market. While he accepts that it may not be possible to bring UK tax rates to the same levels of Bermuda, he says the gap needs to be closed somehow.

"We need to make sure that if there is a differential, London makes up for it in other ways," he says.

Greg Carter, an analyst at Fitch Ratings, agrees. "Lloyd's is not in a position to compete from a tax perspective, but I would expect it to emphasise the advantages that it does have - such as licensing in 90 to 100 countries and the fact that underwriters can take the [A grade] financial rating of the market as a whole. If a company set up on its own, it would never achieve such a strong rating so quickly."

Lord Levene has already set out on a mission to persuade the Government to review its taxation of insurers, before Lloyd's and the London market lose any more business. Although the Treasury is reported to have "an open mind" on such matters, it has yet to follow this with any action.

Lloyd's has also been working with the Financial Services Authority to ensure the market is not over-regulated. However, Mr Carter points out it is a much harder balance to achieve. "There are still difficulties in terms of regulatory requirements, and I think the FSA's requirements are quite onerous," he says. "However, one of the fundamental remits of the regulator is to protect policyholders. So there's a limit to how far you can lighten the regulatory environment."

Finally, there is the technology issue. Mr Sperryn says while companies are understandably impatient about bringing an electronic trading system to Lloyd's, the number of parties involved means it is inevitably going to be a long process.

Mr Farr says the nature of the business also makes it more difficult to establish a robust system. "People have been moaning about lack of electronic trading for years. But for complicated risks, there is a certain amount of face-to-face negotiation that is required."

Although most in the market agree Lloyd's will survive the current threat from Bermuda, they concede that it must continue to modernise as fast as it can, while the Government must do its bit to keep London a competitive market.

"Last year, the hurricanes constituted the biggest insurable loss the world has ever known," Mr Sherryn says. "And Lloyd's came through with a modest loss of £100m. In a market of £14bn, that's an outstanding record. How better can I convince you of the success of the market?" He adds: "There's huge strength in the market. But it will only remain that way if we continue to be quick to change, and determined to meet the challenge from Bermuda - and anywhere else."

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