The Bahamas must not fall asleep after it gained “two years’ breathing room” to escape the European Union’s (EU) tax blacklist and preserve up to 40 percent of its hurricane reinsurance capacity, insurers are warning.

While the immediate threat has been eliminated, Bahamian property and casualty underwriters are urging the Government to promptly enact the necessary reforms to secure this nation’s exit from the EU listing and thus preserve their ability to continue writing present levels of coverage.

Should the 27-nation bloc’s ‘blacklisting’ remain in place, it could still bar German reinsurers from underwriting multi-billion dollar risks in The Bahamas as of end-2024 despite that country’s parliament eliminating the more immediate threat of a 15 percent withholding tax being imposed on all claims payouts to this nation.

Anton Saunders, RoyalStar Assurance’s managing director, told Tribune Business that the German legal amendments passed last Friday should give The Bahamas sufficient time to satisfy the EU given that this has removed the possibility of a 15.82 percent withholding tax rate being levied on claims payouts from January 1, 2023.

However, he added that the German legislature has yet to change another legal clause “which says come January 1, 2025, if the country is still on the blacklist then the German reinsurers can’t use expenses, which are commissions or claims, as a tax refund on their bills or returns from whatever companies.

“That means if we are still on the blacklist at the end of 2024, we’ll be subject to that law,” Mr Saunders explained. “We have until December 31, 2024, to get off this blacklist. They [the reinsurers] will not be able to do business if they are unable to get a refund on their taxes.

“We have two years’ breathing space, 2023 and 2024, to get off this blacklist. The German reinsurers provide 30-40 percent of the market, and it will be very hard in this environment to replace them. We need to get off this blacklist as quickly as possible.

“We have two years’ breathing room from an insurance standpoint to make sure that is dealt with. If we’re still on that blacklist, and they can’t take their credits from commissions and claims, they will not be able to do business with us.”

Patrick Ward, Bahamas First’s president and chief executive, who told Tribune Business he thought The Bahamas has only one year to escape the EU’s blacklist, believing the German law will kick-in from New Year’s Day 2024, warned that the loss of such reinsurance capacity threatened the “viability” of local underwriters’ business models as well as their capacity to insure risk in an era of more powerful and frequent storms.

Confirming that the German withholding tax threat has been eliminated, he said: “With the passage of that we believe the issue around the possibility of a withholding tax on claims payments and a few other issues have been resolved. But if The Bahamas remains on the blacklist in 2024, there are some other provisions that will kick-in that are onerous and will make it virtually untenable for German reinsurers to do business with Bahamian companies.”

Pointing out that this would impact all Bahamian industries and companies that do business with German firms, not just insurers, Mr Ward added: “The key now is to get off the EU blacklist. It’s very important otherwise 2024 could be a very daunting year.... That’s the potential unless there are some mitigating factors, but at this point that doesn’t appear to be the case.

“The important thing is to get off this blacklist otherwise it could be a real problem. We’re operating in an environment where reinsurance capacity is extremely tight, so there will not be a lot of options for replacing them. We could lose the ability to write a substantial amount of business that we currently write in terms of having it supported by reinsurance.

“That could mean there are other decisions that are going to hinge on that. Do you have a viable business model in the absence of that kind of capacity or support?” Property insurance, including catastrophe protection against storms, and motor coverage would be among the main business lines impacted from a loss of German reinsurance.

Mr Ward said three German reinsurers - Munich Re, Hanover Re and R & V Re - account for around 30 percent of the Bahamian reinsurance market. The loss of such partners would leave a huge void for local underwriters to fill, and likely mean they cannot take on as much risk - and cover as many property and vehicle assets - at a time when Hurricane Dorian inflicted $3.4bn in loss and damages in September 2019.

Already-expensive insurance coverage, especially that which protects against hurricanes, would only increase further due to the cutback in reinsurance supply. In turn, this would push premium prices beyond the reach of more Bahamian businesses and households, making insurance increasingly unaffordable in a climate where the threat posed by Dorian-style storms is growing.

Bahamian property and casualty underwriters must acquire huge amounts of reinsurance annually because their relatively thin capital bases mean they cannot cover the multi-billion dollar assets at risk in this nation. And global reinsurance market has already been recently been pulling back from the Caribbean due to hurricane-related losses.

With all this in play, Mr Ward said the Government needed to fulfill its pledge to enact the necessary reforms that will ensure The Bahamas exits the EU blacklist as rapidly as possible. Turning to the new year, he added: “Unfortunately we’re not going to be starting out from an optimum position, but at least we’ve done away with the imminent threat for 2023. We need to focus on doing as much as we can in the early part of the year” to address the blacklisting.