Insurance CEOs say payroll tax increase cost jobs and damaged trust
Insurance CEOs believe that the payroll tax increase of two years ago caused Bermuda jobs to be lost and a rupture of trust between Government and the industry.
Speaking at a CEO roundtable organised by the Bermuda Insurance Journal magazine, XL Groups Mike McGavick, Endurance Specialty Holdings David Cash and Hiscox Bermudas Charles Dupplin agreed that damage caused by the tax increase had lasted longer than the one year it was in effect before being rolled back.
Mr McGavick said the industry had been assured of an opportunity for discussion before any increase in employment tax, but this had not occurred in the case of the 2010 payroll tax rise, causing trust to be damaged.
In talks after the two-percentage point tax rise, industry leaders informed Government that it would lead to a silent exodus of jobs from the Island, Mr McGavick added, and thats what had happened.
The damage was not irreparable, the XL boss said, and Government had made some moves in the right direction but was now having to scramble to get Bermuda back to a position of competitive advantage.
Mr Cash said the negatives of the payroll tax decision had far outweighed the benefits and Government seemed to have underestimated the financial impact it would have on companies.
Mr Dupplin said the honey trap offered by Bermuda had to be constantly reviewed and adjusted to ensure it remained attractive.
Their comments came in the context of wider, hour-long conversation, taking in regulation, insurance market conditions, and the proliferation of cat bonds and sidecars. An edited transcript will be published in the Bermuda Insurance Journal, free with Hamilton area newspapers on August 31.
The payroll tax increase was destructive financially, it took what was a close call and made it a bad call, Mr McGavick said in explaining how the rise had made Bermuda a less attractive place to employ people.
As we shared with the Government at the time, you will have a silent exodus of certain kinds of jobs. There wont be a big lay-off because of this, it will be that when a job becomes open, it will be looked at in a different equation than it was before.
And, then it reaches tipping points when whole groups leave because enough people have bled out and critical mass was lost.
He added that there had been a lag in the effects of the global financial crisis of 2008 hitting the Bermuda economy, a time in which he believed there was an overconfidence, a feeling that the Island would somehow be immune to the downturn.
I think there was a late recognition here that the Bermuda Government was going to need to think harder about how to make Bermuda relatively more attractive in order to retain more of the activities of these companies, Mr McGavick said. That delayed reaction has been costly.
Mr Cash felt the payroll tax increase had been a mistake.
For some of our international staff that come to Bermuda, they work in Bermuda but still pay income taxes where they come from and then theyre paying payroll taxes here, Mr Cash said.
In order to attract that talent to the Island, we have to help with the cost of the payroll tax and in just paying their payroll tax, we then have to additionally pay a top-up to reflect the fact that, too, is income that is taxed back in their home country.
The dollar cost was much larger than people imagined in terms of cost to us for our staff.
Thats something that should not have been done, it was short-sighted — the benefits were vastly outweighed by the negatives.
Mr Dupplin said Bermuda was an expensive place to employ people and so any increase in employment costs would cause international companies to relocate jobs to cheaper locations.
Were at a cliff edge at the moment where if you alter the balance, it becomes unattractive to do things here, Mr Dupplin said. For me, with a relatively small shop — 40-plus people here — its very convenient to have the finance department here, but if you load up the costs again then Im afraid economics could force a change.
I think there is a good understanding of that in Government circles but I think its an overall thing that the honey trap bringing businesses here is something that needs to be looked at regularly, not just as a special thing, and constantly tweaked and improved.
I heard recently that a work permit for a mid-level person came through in three days and I thought thats remarkable if its true.
Just the rumour of that will rush around and make people feel good. Thats a good thing because previously when I have had to bring someone to the Island my heart sank somewhat because I knew we are going into a very long process even though it seemed clear to me to be in the interest of the Island.
No one would bring anyone here unless they really had to — its fantastically expensive.
Many international companies have relocated jobs out of Bermuda to offices in other parts of the world in recent years. In May, the Association of Bermuda Insurers (ABIR) said Bermuda-based employment among its 23 member companies fell for a fourth successive year in 2011 — the fall was 23 percent over that time among ABIR companies who had traditionally been the largest employers on the Island.
Mr McGavick said some functions, such as senior management and finance, were increasingly being done elsewhere by many industry participants.
Its narrowing down to the underwriting activity and that changes the relationship to the Island, he said. I think that was not richly perceived and I know that it was shared and the conversations took place, I was in some of them. They were particularly hot and heavy at the time of the payroll tax increase.
The lack of any pre-warning of the tax hike had damaged trust, he added.
There had been a literal understanding, the last time it was raised, that there would be a discussion of the payroll tax if it ever needed to be raised again, Mr McGavick said.
We all, after having had that understanding and discussion, found out it was being moved after it had been adopted. So there was not only a change in cost, it was a rupture in trust.
I dont think that has been entirely cured. Everything since strikes me as a scramble to get back to trust, to get back to competitive advantage. At that point, youre chasing a challenge.
Id love for Bermuda to succeed at that challenge but its damn difficult once you get behind because the world is in a fierce competition for talent and capital and you never want to give up an advantage.
However, Mr McGavick said efforts were now being made to repair the damage.
I need to be clear — the Government is clearly trying to recover, has been seeking and taking counsel. That is very much appreciated.
The reality is that not very far from now, were headed into an election. This always creates a more difficult time for governing and an uncertain time for those who are taxed and regulated. So I dont really expect that during this period, very bold things can be done and thats unfortunate because the clock continues to tick on this.
Mr Cash said he understood Governments focus on attracting senior executives, but said easing the work permit process for employees further down the ladder would actually help the employment situation for Bermudians. He used Endurance as an example.
Our business is built around middle managers and talented underwriters who are not so senior that they so obviously deserve a quick work permit, that being said having those individuals on our staff for long periods of time really does strengthen our organisation and anchors our operation on the Island.
I would hope for the Government to look at those individuals very positively, as each one of those work permits granted actually results in a number of other jobs being created on the Island.
The focus should be less on the fact there might be competition for that job and more on the fact that the work permit brings people to the Island, creating other jobs.
Mr Cash said much could be learned from Singapores efforts to attract talent. Work permits were straightforward to obtain, while the propensity for building vertically made accommodation plentiful, he said.
On our side, were cautious about giving work permits, were nervous about the real estate issue and were not ambitious in terms of creating sensible incentives to draw people to the island, he said.
If youre not ticking all three boxes, theres a competitor such as Singapore that is ticking those boxes and thats a challenge for Bermuda.
Mr Cash added that in the event of a major insurance loss event, much of the new capital coming into the industry afterwards would still probably flow to Bermuda.
I think the key players when it comes to founding and financing the start-up of new insurance and reinsurance companies, particularly private equity, still view Bermuda in a positive way.
It may not be a warm feeling, but it is a positive and pragmatic view of the Island. These investors see Bermuda as necessary to make that model work and for that reason it is fair to say that not all is lost.
Youd be hard pressed to get the capital to form in Switzerland, somewhat hard pressed in Singapore and no luck in London or Dublin. And, why would you form in New York?
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