ZURICH (Bloomberg) — Bermuda-based Catlin Group Ltd. is to join Amlin Plc and Endurance Specialty Holdings Ltd. in expanding in Switzerland to gain from proposed capital rules that may boost demand for reinsurance coverage in Europe.

Catlin, owner of the largest insurance unit at Lloyd's of London, plans to form a wholly-owned unit in Switzerland, the firm, as reported in yesterday's Royal Gazette. The number of reinsurers in Zurich has doubled to 31 since 2006, before the European Commission adopted the Solvency II proposal, data from New Reinsurance Co. show. The new directive is designed to align insurers' risks with the capital they hold to ensure clients' claims are covered.

"The thinking appears to be that it pays to be on the ground as European primaries are looking for new reinsurance carriers driven by Solvency II," said Hamish Chalmers, a London-based analyst with Macquarie Group Ltd.

The planned regulation, which is due to come into effect by 2013, is likely to force insurers to raise the amount of capital they hold against liabilities. Some forms of reinsurance will be accepted as a potential alternative source of capital. Reinsurers also say they are choosing Zurich over other European locations in part because Switzerland has attractive tax rates.

Catlin's new unit will allow the reinsurer to benefit from "opportunities created as the result of the forthcoming Solvency II regulatory regime," it said in a statement on Tuesday. The holding company will remain in Bermuda.

"Successful implementation should drive earnings" and may add as much as 10 percent to Catlin's revenue, Ben Cohen, a London-based analyst with Collins Stewart Plc, wrote in a report on Tuesday. Cohen has a "buy" recommendation on the stock.

Capital requirements of insurers, such as Allianz SE and Axa SA, may rise because of the proposed rules, according to a report by Fitch Ratings dated June 2. Swiss Reinsurance Co., the world's second-largest reinsurer, said June 11 that Solvency II will influence returns in coming years.

Reinsurers provide insurers with coverage against peak risks such as natural catastrophes, pandemics or very large liability claims, helping them shoulder and diversify risks in return for insurance premiums.

Amlin, the biggest insurer at Lloyd's of London, said in May it would move its Bermuda-based unit, Amlin Bermuda Ltd., to Zurich to tap European small and mid-sized companies for non-life reinsurance business in countries including Belgium, Germany, Italy and Luxembourg.

Consolidation in the European reinsurance industry, an increased focus on counterparty credit risk, and Solvency II "could be drivers for continental European insurers to look for an increased spread of their reinsurance purchasing," said Philippe Regazzoni, chief executive officer of newly created Amlin AG.

"The move gives Amlin a diversification in terms of lines of business, geography, and client base," he said. The company aims to expand its new office, which is close to Lake Zurich and competitors Endurance, to 25 people from the current six by the end of this year.

Bermuda traditionally is a base for reinsurers who write US and international property catastrophe coverage. European insurers tend to buy from a reinsurer in the same region, analysts said.

European insurers have criticised new capital rules — as proposed by the Committee of European Insurance and Occupational Pension Supervisors — for being "excessively prudent." Standard & Poor's in February said insurers' capital needs may rise about 70 percent based on earlier advice by Ceiops, as the body consulting the EU Commission on Solvency II is known.

Meanwhile, some of the requirements have been eased and to test the proposed rules a fifth quantitative impact study will be carried out among insurers from August until mid-November. Ceiops plans to publish the results in April 2011, according to the EU Commission's Solvency II timetable.

Reinsurers may profit from Solvency II as an increase of reinsurance cover "will be potentially the most efficient way for primary insurers to reduce capital requirements," according to Fitch Ratings.

"The only capital that you can find in the market to reduce earnings volatility is through reinsurance," Marc Beckers, head of analytics Europe, Middle East and Africa at Aon Benfield, said in a phone interview from London on June 25. "The reinsurers are concerned that if they are in Bermuda and they have to calculate their capital under Solvency II schemes as well as under the local regulation it's going to put them at a disadvantage and create a lot more costs."

The potential benefits of new regulation aren't Zurich's only attractions for reinsurance companies, said Karl Mayr, chief executive officer of Axis Re Europe, the Zurich-based European reinsurer of Bermuda's Axis Capital Holding Ltd.

"While I believe that Solvency II will influence reinsurance purchases, it will take considerable time till we will see material changes," Mayr said June 2. Reinsurers are looking for an alternative to Bermuda as US President Barack Obama clamps down on tax havens, and "another half a dozen potential candidates" may come to Zurich from Bermuda, mainly because of the tax, legal and regulatory environment, he said.

The 2004 Jobs Act, which made it costly for US companies to relocate to overseas domiciles, and Obama's tax clampdown have spurred an exodus of firms from jurisdictions that don't have full tax treaties with the US, including Bermuda, according to Larry Kemm, partner at law firm Sharp Kemm PA in Tampa, Florida.

Companies relocating to Switzerland negotiate through accounting and law firms to obtain an tax ruling from one of the country's 26 cantons, including the cantons of Zurich and Zug, which may offer tax breaks with the expectation that new arrivals will create jobs.

Swiss corporate tax rates, including a federal rate of 8.5 percent, range from 11.8 percent in the town of Pfaeffikon in Schwyz to 24.2 percent in Geneva, according to tax consultant Mattig-Suter & Partner. That compares with a corporate tax rate of 28 percent in the UK and 35 percent in the US.

"The fact that more people move makes more people contemplate whether they shouldn't seriously consider that too," said Andreas Molck-Ude, chief executive officer of New Re, which moved its headquarters from Geneva to Zurich last year because it was easier to recruit "appropriately skilled underwriters" there.