Higher capital requirements for European Union-based insurers from the imminent Solvency II regulations may increase the market for global reinsurers — which could be good news for the Bermuda market.

That is the view expressed in a report jointly produced by financial services giant Morgan Stanley and global management consultancy Oliver Wyman.

And if regulator the Bermuda Monetary Authority achieves its aim of winning equivalence with Solvency II, then some reinsurers might consider the Island a more attractive domicile than EU countries, the report adds.

"Reinsurers — and others with insurance business that can be operated in the EU from third countries (such as large-risk P&C) — could consider whether domiciles in equivalent states such as Bermuda or Switzerland could be more attractive than the EU," the report states. "That depends on the regulatory as well as the operating environment."

Bermuda, along with Switzerland, will be in the first wave of non-EU jurisdictions assessed for equivalency, the Committee on European Insurance and Occupational Pensions (CEIOPS) announced in July.

The United States, where each state has its own set of insurance regulations, will not be in that first wave. The report suggested that some EU insurers with US subsidiaries may consider exiting the US, if it does not advance towards equivalence in the medium term.

One of the impacts of Solvency II, which is expected to take effect in 2013, will be to raise capital requirements for EU insurers. One way for insurers to improve their capital position will be to buy reinsurance, the report states.

"We estimate that Solvency II could increase demand for reinsurance in Europe by ten to 20 percent," Morgan Stanley and Oliver Wyman state.

The companies best placed to benefit will be "the better capitalised, larger and globally diversified reinsurers".

The authors estimate that the large amount of surplus capital in the reinsurance industry is likely to be sufficient to meet extra demand.

While it was difficult to estimate the impact on reinsurance prices, a sharp rise in rates would likely bring a greater inflow of capital into reinsurance. The report went on: "In particular, a strong improvement in pricing may create better conditions for growth in the ILS [insurance-linked securities] market, allowing in capital external to the reinsurance industry."

Bermuda has attracted an increasing amount of ILS business since legislation enacted last year created the new classification of Special Purpose Insurer (SPI) and created a framework for products of this type, such as catastrophe bonds.

Morgan Stanley and Oliver Wyman stress however that, in the short term at least, EU insurers will first turn to conventional reinsurance to improve their capital position and the ILS option may come later on.