• Warn Bahamas has one shot to escape EU list

• Otherwise German reinsurers could withdraw

• New business halt, further hike in record prices

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian insurers yesterday warned they, and thousands of businesses and homeowners, will face “tremendous economic hardship” if 35 percent of reinsurance capacity is lost by The Bahamas failing to escape Europe’s tax blacklist.

Major property and casualty underwriters told Tribune Business that The Bahamas is running out of time to exit the European Union’s (EU) non-cooperative list, and in effect has only one shot at achieving such an outcome through this October’s review, if it is to secure continued German reinsurance support that is “critical” to maintaining coverage for key real estate, auto and other assets.

Anton Saunders, RoyalStar Assurance’s managing director, explained that reinsurers such as Munich Re will be prevented by German law from receiving tax relief or deductions on hurricane-related claims payouts to The Bahamas if this country still remains on the 27-nation EU’s blacklist after the October review.

Given that such payouts will likely be worth hundreds of millions of dollars if a Dorian-strength storm strikes a major Bahamian island, he added that the loss of such tax relief might deter German reinsurers from continuing to support local carriers such as RoyalStar by underwriting the bulk of this nation’s risks.

Such a scenario, if it happens, would occur at the worst-possible time given that reinsurance capacity and willingness to underwrite risks in the disaster-prone Caribbean is at a near 30-year low. Insurance Company of The Bahamas (ICB), in its just released 2022 annual report, said the drop in reinsurance availability has already pushed property insurance costs for Bahamian homeowners and businesses to the highest levels it has seen in its 26-year history.

And premium prices would be sent skyrocketing even further if Bahamian insurers lose German reinsurance support through this nation failing to exit the EU’s blacklist. Timothy Ingraham, Summit Insurance Company’s managing director, told this newspaper that the loss of such backing would likely force all local property and casualty underwriters to halt taking on any new business, adding: “That’s not a scenario we want.”

For the progress of new commercial and residential real estate developments, which generate growth and jobs, may be halted if they are unable to obtain the insurance coverage their lenders demand. The Davis administration has been working feverishly to address the deficiencies cited by the EU in time for the latter’s October blacklist review, while at the same time blasting the bloc for unfairly targeting The Bahamas with an initiative based on double standards.

Both Prime Minister Philip Davis KC and Ryan Pinder KC, the attorney general, have in recent weeks blasted the EU for subjecting this nation to demands it refuses to impose on its own members even though the likes of Luxembourg are viewed by many as far greater offenders when it comes to tax transparency.

And, acknowledging the insurance industry’s fears, both have warned that Brussels’ initiative threatens to make it harder for The Bahamas to rebuild in the wake of natural disasters if reinsurance support is lost. Mr Saunders, while praising the stance they and the Government have taken, warned that this has to be backed by concrete action to almost guarantee that this nation escapes the EU blacklist by October/November 2023 as this is when the next reinsurance cycle starts.

“The Prime Minister and the Attorney General have made statements on the blacklisting and how unfair it is to countries like ours,” the RoyalStar chief said. “I think we all in the industry are happy they are taking a keen interest in what is going on. However, at the end of the day, we hope the technocrats are doing their job to ensure we get off this blacklist.”

The Bahamas was re-listed by the EU in late 2022 for alleged deficiencies with its ‘economic substance’ regime - in particular the online portal via which companies fulfilled their reporting requirements under Bahamian law. ‘Economic substance’ requires specific companies to be doing real business in the jurisdiction and have a physical presence - not be operating as ‘brass plate’ or ‘letterbox’ companies.

The Government has moved to correct the flaws with the economic substance reporting portal, having contracted BDO to develop a solution that will address the EU’s concerns. Mr Pinder previously voiced optimism that The Bahamas is on course to escape the 27-nation bloc’s blacklisting when it reviews the allegedly non-cooperative countries in October.

Mr Saunders, meanwhile, said reforms to Germany’s Tax Haven Prevention law have already eliminated the concerns referenced by Mr Pinder and the Government - that the German authorities could apply a 16 percent withholding tax on claims payouts to blacklisted countries such as The Bahamas.

While this is no longer a threat, the RoyalStar chief explained the remaining worry is that the same German law still prohibits its reinsurers from being able to claim tax deductions, or relief, on these claims payments. Should this provision stay, and The Bahamas remain on the blacklist post-October, these reinsurers may determine it is no longer worth doing business with this nation because they will lose valuable income while potentially spending hundreds of millions of dollars.

“That’s not on the table any more. That’s been resolved,” Mr Saunders said of the withholding. “The Germans have passed an amendment to that portion of the law. What has not been resolved is the taxation of the reinsurance industry. They will not be allowed to deduct their taxes if there’s a big loss. If that law is not changed, or we’re not off the backlist, they may not be willing or able to trade with us.

“Therefore we will not be able to access that [reinsurance] capacity, meaning that 35 percent of reinsurance capacity for Caribbean countries can potentially disappear for blacklisted countries, which will cause tremendous economic hardship for the insurance industry in the Caribbean and, especially, The Bahamas.

“If they cannot claim income tax deductions they will not do business because we are talking big monies. And if we cannot access 35 percent of our market, what do you think is going to happen to insurance costs? It will be availability first, and then the insurance costs. We are just waiting and hoping that October brings positive news.”

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, thus making them dependent on global support.

German reinsurers such as Munich Re, Hanover Re and R & V Re have played pivotal roles in providing such backing. However, escaping the EU blacklist is becoming increasingly time sensitive, and must be accomplished by October, for this is when Bahamian property and casualty underwriters typically will begin negotiations on their reinsurance contracts - including prices and terms - for 2024.

Summit’s Mr Ingraham told Tribune Business that Germany’s Tax Haven Prevention Act, as it currently stands, will impose a 30 percent penalty on the annual tax returns of that jurisdiction’s reinsurers should they make claims payouts to blacklisted states such as The Bahamas.

“It could be a significant amount of money they are not allowed to claim back through their tax system,” he added. “So German companies will be faced with a loss of their ability to claim back money and may decide not to do business with so-called tax havens because it becomes a penalty.

“If you look at the fact that German reinsurers provide a substantial amount of reinsurance to this country, let’s say on the high-end 25-30 percent, if you look at an event like Dorian where there was a total $2bn payout that’s $500m the German companies are responsible for. If they’re not able to claim 30 percent tax relief on that, that’s quite a chunk of money that’s being lost.

“I have heard one or two companies that have said to do business in this jurisdiction is against the spirit of that [Tax Haven Prevention] Act. We have one or two reinsurers who have said they will not continue to do business until we are removed. Once we’re removed from the blacklist, they’ll be able to enter the market again,” Mr Ingraham added.

“That’s why it’s critical for us to make every effort to come off the EU blacklist to ensure we continue to have reinsurance support. At the moment, there is a large gap between supply and demand for reinsurance globally. What we’ve seen in this country is that it could be difficult to find insurance, number one, and once you do, it’s very expensive.”

Pointing out that this is a global challenge not peculiar to The Bahamas, Mr Ingraham added that any loss of German reinsurance support would only worsen these problems for consumers. “It would be very difficult, if not impossible, to replace the German capacity on reinsurance treaties so it’s critical for us that we continue to do business with these reinsurers,” he added.

“It is really bad timing for something like this to happen because we cannot go out and replace that capacity.... We’re already seeing high prices and lack of capacity, with one or two insurers not taking on any new business. We’d probably see that expand to the entire market where nobody is taking on new business. That’s not a scenario we want.

“We are in constant contact with the Government on this. They have promised us they are in the process of presenting some Bills to Parliament to address it and will do whatever is required to remove us from the blacklist. It needs to be done by October because that’s when the next review comes up. We’ve spoken to the Government several times and they appreciate the urgency of it. They have told us they are making every effort to get it corrected and we are cautiously optimistic they will.”