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Barely tolerated

Bermuda found itself back under the microscope in the US congress this week when the Senate finance committee held hearings on whether offshore reinsurance companies have an unfair tax advantage over their US counterparts.

At issue are provisions in the US tax laws which allow US-based subsidiaries of Bermuda companies to reinsure themselves with their Bermuda parents, who in turn can invest the premiums they received without paying tax on any gains.

That sounds reasonably dry, but the ramifications for the Bermuda insurance market are fairly serious. Donald Kramer, one of Bermuda's most successful reinsurance executives was tasked with defending the Bermuda position and did a reasonably good job.

He rightly told the Senate committee that Bermuda reinsurers had paid huge proportions of the claims emanating from the September 11, 2001 terrorism attacks and the record hurricane season in 2004, culminating with Hurricane Katrina.

Going back not much further, he could have pointed out that it was Bermuda insurance companies that filled the gap when insurance coverage in the US for excess liability claims and directors' and officers' insurance dried up in the 1980s and when catastrophe insurance and reinsurance in the US was not on offer after Hurricanes Andrew and Hugo in the early 1990s.

All of that is in the record and it would seem Senators Max Baucus and Chuck Grassley, the committee chairman and ranking minority member, understand that.

Mr. Kramer also had to make a more difficult argument. On the one hand, he said, Bermuda reinsures would like to keep the tax arrangements as they are, not least because they help the companies reserve for massive claims. But the tax arrangements are not the primary reason Bermuda's insurance market has boomed. Reasonable regulation, the fact that the companies are not forced to remain in loss-making markets and the Island's infrastructure and critical mass of insurance minds are also important.

So tax is an important reason why they are here, but far from the most important, he argued. He is right, and most people in the Bermuda community also know that changes to US tax regulations would not see reinsurers move to the US. They might move somewhere else where they can get a good deal in other ways.

For Bermuda generally, there are also good reasons to keep the reinsurers here, and it would be wise for the Government to continue to lobby the US on this question. Indeed the proposal has been made that if the US wants to keep what's left of its reinsurance sector, it should lower its taxes, not punish Bermuda.

But Bermuda also needs to make sure the reinsurers in Bermuda or contemplating a move here know that they are welcome. And it has to be said that that's not the message that's being sent out. From "Goodwill Plus" to floating ideas for limiting the number of expatriates who can own cars to treating the reinsurers like never-ending taps of cash to the cause or event of the moment, Government is basically telling reinsurers that they are tolerated, but not exactly welcomed.

That in turn is seeing a continued to move to outsource jobs that could be done in Bermuda but can be done as easily and more cheaply elsewhere. So perhaps the message that should be sent to the US Senate, is don't worry about cramping the Bermuda reinsurance industry, Bermuda's doing the job very nicely in its own.