Bermuda will not dominate as the top insurance domicile of choice for start-up companies in the next decade in the same way as it has done the last ten years, according to analysts Standard & Poor's.

In a special report entitled "Competing Insurance Domiciles Are Closing The Gap With Bermuda", S&P focuses on perceived regulation shortfalls, the Island's infrastructure limitations and its tax advantage coming under attack as reasons why rival jurisdictions will catch up.

"Bermuda has been the undisputed insurer capital for start-ups and re-domestications in the past decade," the report states. "However, other regions have learned from Bermuda's success story and the signs are that Bermuda won't dominate the industry over the next decade.

"Bermuda will remain important, but insurers are also beating a path to Dublin, Dubai, Zurich and Luxembourg in a bid to be closer to their customers. Lloyd's is also adding new syndicates."

It summarises the challenges facing the Island as "the perceived regulatory shortfalls relative to well-established regulators, reputation risk resulting from a diminished regulatory focus on market conduct, the sustainability of the tax advantage, and the operating constraints of conducting business in a relatively isolated island location". S&P adds: "These factors have the potential to disrupt Bermuda's market competitiveness and in the most extreme scenario, jeopardise its formidable market presence."

Bermuda's zero rate of corporate taxation gives the Island a competitive advantage, but has also encouraged others to apply political pressure in their own jurisdictions to close this gap. The report highlights how the practice of inter-company reinsurance as a means of transferring profits to a lower-tax jurisdiction is being challenged, in the US and further afield. "Although nothing appears imminent, the potential exists that this issue could be acted on at a future date, adversely impacting the tax advantage enjoyed by Bermudian domiciled companies," S&P adds.

Many Bermuda-based companies had opened branches overseas, to aid their global expansion. This would give them an obvious solution if the Island were to lose its tax advantage. "Thus an unforeseen change in the tax environment would be addressed through the movement of operations to another domicile," the report states. "In contrast, companies overly dependent on the Bermuda jurisdiction would find themselves at a competitive disadvantage." S&P does, however, comment on what has helped Bermuda to become a force in the insurance world and factors that are keeping the Island ahead of rivals. "Although competing domiciles have achieved some success, Bermuda's well-established infrastructure has enabled it to sustain a formidable competitive advantage bolstered by a critical mass of talent and meaningful support services not present in many of the upstart domiciles," the report states. "Furthermore, Bermuda's geographic proximity to the US market fosters an additional competitive advantage.

"However, well-established insurance domiciles, particularly in Europe (Ireland, Luxembourg and Switzerland) have significantly enhanced their competitiveness through competitive tax rates and the advent of 'European Passporting'. The growth of these domiciles highlight that market access, infrastructure and talent are also important in choosing locations."

The European passport concept, in conjunction with the European Union's Reinsurance Directive, allows insurers licensed in one EU country to operate in others with reduced regulatory hurdles.

S&P said it was important for Bermuda to get its regulation in line with more established jurisdictions. "The risk to Bermuda is that if it does not bring its regulation in line with 'better' peers, the Bermuda market could be precluded from reaping the benefits realised through the concept of 'regulatory mutual recognition' that enable companies licensed in one 'well-regulated' jurisdiction to enjoy similar market access and/or capital credit provisions achieved by companies licensed in the local market."

S&P pointed out that a key driver in the Bermuda market's growth had been the honesty and integrity of its participants. "The positive track record has enabled Bermuda insurers and reinsurers to gain market acceptance around the world," the report stated. The successful raising of capital in the aftermath of the devastating 2005 hurricane season was an example of this.

But there was a reputational risk, should a Bermuda insurer fail to follow established market conduct norms, S&P added. The IMF had noted "a lack of focus on market conduct issues" on the Island.

The report also alludes to the physical constraints of the small size of the Island, as it said "Bermuda's resources are highly stretched, which will limit future growth potential".

"This has also given rise to local political tension," the reports adds. "The limited population relative to required insurance expertise requires a significant international presence. Yet the limited geography hampers the availability of infrastructure. The government, cognizant of these concerns, has rationed foreign work permits, further constraining the industry.

"This limits the on-Island ambitions of insurers to the less people-intensive lines of business, although this can be carried out in subsidiaries elsewhere. This is reflected in the statistic that only 10 percent of the staff of Bermudian insurance groups works on the Island."