I’m in a hotel in Hamilton, Bermuda having almost wrapped up an eventful three-days-plus on this little island. I can’t—and won’t—pretend to even scratch the surfaces of Bermuda’s complex, admirable, unique culture or manage to say anything profound about this island. (If you want something really interesting about island life, try OOTS editor Arin Greenwood’s debut novel Tropical Depression, which takes place on a fictional Pacific island called Miramar). I do have one observation that becomes more and more clear every time I visit here: Bermuda isn’t a “tax haven” or a libertarian paradise but, rather, has succeeded brilliantly as an reinsurance capital because it’s in a legal, cultural, and geographic sweet spot.
First, the regulations on the businesses here make sense. The actual business of reinsurance is probably more tightly regulated in Bermuda than in the United States. Bermudian companies have to make sure that they can pay claims and its probably harder to set up a fly-by-night reinsurer here than it would be in the United States. Unlike some U.S. jurisdictions– Illinois and Vermont come to mind in the insurance business—businesses that want the advantage of Bermudian law actually have to do most of their relevant operations here. There’s no corporate income tax here, which is a big advantage, but plenty of other jurisdictions (Germany, Switzerland, and the UK) allow “tax advantaged insurance reserving” which can reduce reinsurers income taxes a lot. Many places in the Caribbean have no corporate income tax too and, some such as the Cayman Islands have tax treaties with the United States that offer more advantages than Bermuda does. The overall package of regulations, while imperfect, is probably the best in the world.
Second, for any number of real social ills—crime is a bigger problem in daily life and a bigger political issue than it has been in the United States in the past decade and a half—Bermuda’s culture, to an outsider, has a lot to admire. While there was plenty of discrimination historically against the majority of Bermudians that have African ancestry and a “black power” movement that once assassinated a governor, Bermuda never had legally mandated segregation (although there was private segregation through the late 1950s) and was the first jurisdiction in the world to abolish slavery outright (1834). Lots of native Bermudians of every skin color work at the highest levels of international business (reinsurance included). Since the overwhelming majority of tourists and many top Bermuda business executives are Americans and the U.S. dollar is the official currency, a lot of the best aspects of American culture—friendliness, willingness to judge people by achievements, respect for individual enterprise, and commitment to equality—seem to have rubbed off. On the other hand, as it’s still nominally under the sovereignty of the British Crown, a lot of the better aspects of British culture—respect for learning for its own sake, enjoyment of leisure time for its own sake—also remain present. The long experience in the tourism industry also means that visitors get treated reasonably well (although international competition and the siphoning of the best and brightest Bermudians into international business means that some very expensive hotels provide only mediocre service.)
Finally, the location is good. Bermuda closer to the UK than any part of the United States but still closer to the big East Coast business centers than any other foreign jurisdiction besides Canada. The good but not perfect weather (it’s almost directly off the cost of Charleston South Carolina), furthermore, is good enough to keep people happy but not so hot that working is impossible during any part of the year.
Bottom line. Bermuda does a lot of things very well and certainly, its policies of low taxes and sensible regulations have helped give it the highest per capita income in the world ($97,000). But its success can’t be explained by defining it as a libertarian paradise.
Sen. Roger Wicker has introduced the Consumer Option for an Alternative System To Allocate Losses Act (COASTAL Act, S. 1091). I praise it here. The bill has a lot to like and, if it passes along with broad reforms to flood insurance, it’s could stabilize a lot of insurance markets along the coasts in the United States. Former South Carolina insurance commissioner Scott Richardson, now a member of Heartland’s advisory board, was the first to propose the fundamental idea of the bill—a standardized system to allocate losses following coastal catastrophes—and I’ve long supported it.
That said, the problem it seeks to confront (indeterminate loss on coastal properties) is not the single largest problem facing U.S. insurance markets: poorly conceived regulations and overgrown residual markets are.
Still, small steps in the right direction are far preferable to not moving forward at all.
I’m thinking more and more about crop insurance every day. The program—which originated as part of the 1938 Agricultural Adjustment Act, which set up the current farm subsidy system—is clearly broken. It doesn’t have the huge accumulated deficit of the Flood Insurance Program but instead drains millions in subsidies from the Treasury and provides more-or-less free-to-agribusiness coverage for catastrophic losses. Private companies, furthermore, get essentially risk free profits by servicing the policies. Totally unfair. It’s a mess and, like flood insurance, the program eventually ought to go.
Until next week,
Eli Lehrer, vice president of Washington, D.C. Operations