The second in a multi-part series on sustainable development in Bermuda.

Like the drowned sailor in Shakespeare’s Bermuda-inspired Tempest whose bones were transformed into coral, the moribund local tourism economy underwent a sea-change of its own in the 1980s to emerge as “something rich and strange”: something very rich and very strange indeed from the vantage point of rank-and-file Bermudians.

After serving as Bermuda’s economic mainstay for more than a half-century and shaping the society, culture and institutions of the Island throughout that time, tourism’s dominant role was abruptly superseded by a newly resurgent offshore financial services sector.

What was once called the exempt company sector of Bermuda’s economy was pioneered in the immediate post-Second World War period by a transplanted British lawyer and an American insurance entrepreneur.

It proved to be a lucrative new source of business which was quickly embraced by Bermuda’s bankers, lawyers and accountants.

The Island’s tax climate, regulatory system, first-rate professional services, ready accessibility by air, modern communications system and attractive climate and amenities combined to make Bermuda an irresistible draw in this newly-emerging field.

But “exempt”, by definition, meant the proliferation of new international enterprises established here beginning in the late 1940s and early ‘50s were exempted from the majority of local taxes, including any existing or future levies based on income, profits and capital assets.

Such an ironclad low-tax regime was, of course, something of a necessary evil given the ease with which the industry could relocate and the choices it soon had in terms of competing jurisdictions.

For many years the offshore sector was the second string in Bermuda’s economic bow.

The industry did not have a large physical presence here — most of the exempt companies existed on paper and their business was shuffled between the desks and filing cabinets of the various banks and law and accountancy firms.

Tourism and its associated businesses and services remained by far Bermuda’s largest revenue-earner and employer even as the industry became increasingly uncompetitive in the increasingly crowded global marketplace.

But in the early 1980s Robert Clements, a senior executive in Marsh & McLennan Co’s insurance-brokerage business and an unacknowledged godfather of the modern Bermuda economy, came up with a novel concept for promoting the Island as a solution to the insurance deficiency existing for many multinational companies at that time.

And Bermuda eagerly battened on to an idea which would radically transform the Island’s economy, social structure and physical infrastructure.

Concurrent with Mr Clements’ plan to develop a new international re/insurance market on the Island, the US-Bermuda Tax Treaty was making its way through a protracted ratification process on Capitol Hill.

The treaty’s primary purpose was to remove a competitive advantage Barbados enjoyed over Bermuda in the tourism field by allowing US corporations to claim tax deductions for conventions held here. But there was also a secondary provision tucked away in the agreement which would waive American income and excise taxes on insurance premium income derived from the United States for eligible Bermuda insurers.

That clause, conferring as it did a kind of “most favoured nation” status on Bermuda, provided the foundation upon which the Island’s modern prosperity is based.

In the immediate aftermath of the US-Bermuda Tax Treaty’s passage, a wave of global re/insurers were incorporated on the Island including ACE and XL and they did indeed serve to counter the US liability insurance crisis. Within a few years Bermuda insurers and reinsurers were also some of Lloyd’s largest capital providers. And Hurricane Andrew in 1992, at that time the costliest storm in US history, led to the creation of a new class of specialist property casualty reinsurance companies in Bermuda, a field the Island came to dominate in subsequent years.

The local market had quickly established itself as a power player in the global industry. In 1981 Bermuda had 1,017 registered insurers, writing $4 billion to $5 billion in premiums. By 1991, as a direct consequence of the tax treaty, the number of insurers had increased to 1,323 — but they were now writing fully $13 billion in premiums. And in 1997 the local industry was writing gross premiums of more than $27 billion.

Unlike the “paper companies” which constituted the bulk of captive re/insurers established in Bermuda until passage of the Tax Treaty, the new breed of firm did have a heavy on-the-ground presence here.

And the staffing needs of these companies meant hundreds of qualified professionals had to be brought in from overseas, experts in highly specialised fields which very few Bermudians were even remotely familiar with in the late 1980s. And as the industry grew, so did its manpower requirements.

Initially Bermuda took this sudden shift in economic emphasis in its stride. Tourism and its satellite industries were effectively absorbed by the new re/insurance juggernaut. Hotels, airlines serving the Island, restaurants, the retail sector, all benefited from the new business generated by locally based re/insurance employees, their families and corporate visitors.

Hamilton began to undergo a building boom to keep up with an almost insatiable demand for commercial office space.

And there was a second, almost concurrent spike in construction as an ever-expanding supply of executive homes and condominium developments came on the market to house the large number of foreign employees essential to this burgeoning sector of the economy.

A Bermudian economic renaissance was in full bloom. But the windfall of dollars blinded us to both the long-term sustainability of this boom and also to the fact tourism-related businesses continued to pay the bulk of the tax burden in the buoyant new Bermuda economy, a manifestly unsustainable situation.