ZURICH/LONDON (Reuters) - Bermuda's status as the pre-eminent reinsurance industry hub faces a growing challenge from Switzerland as the Alpine nation exploits regulatory shifts that are eroding the Island's appeal to reinsurers.

Bermuda, a British overseas territory 650 miles off the eastern coast of the United States, has for 25 years been the domicile of choice for reinsurers because it offers low taxes and a comparatively light regulatory burden, as well as proximity to key US markets.

But long-standing concerns that the United States could take steps to limit Bermudian insurers' tax advantage, combined with fresh worries over the impact of strict new capital rules in Europe, are prompting some reinsurers to think again.

Switzerland, home to Swiss Re, the world's No.2 reinsurer, is emerging as a key beneficiary, helped by a regulatory framework that is seen as closer to Europe's new capital regime, as well as competitive tax rates of its own.

Switzerland also scores points over its island rival because it offers state-of-the-art infrastructure, plentiful office space, and a large pool of suitably qualified workers.

"Tax might be zero in Bermuda but operating costs are high and people can get 'island fever' living there," said Chris Waterman, an analyst at ratings agency Fitch.

"A place like Zurich also has tax advantages, great communications as it's placed at the centre of Europe, and a highly skilled workforce."

Bermuda-based Allied World, which last week announced plans to move its holding company to the Swiss town of Zug, looks set to be the next reinsurer to make the move.

Allied World follows in the footsteps of London-listed Amlin, which in May announced plans to move its Bermuda-based reinsurance unit to Zurich, while Ace redomiciled to the Swiss financial capital from the Cayman Islands two years ago.

Reinsurers are also seeking alternative homes in other European centres, with No.15 global player XL Group redomiciling to Dublin from the Caymans, and smaller rival Flagstone Re switching to Luxembourg from Bermuda this year.

"The rise of domiciles such as Dublin and Zurich pose a credible threat in becoming the destination of choice for reinsurers," said Chris Klein, head of reinsurance markets at reinsurance broker Guy Carpenter.

Bermudian reinsurers with a growing presence in Europe might naturally consider redomiciling to be closer to their customers, but analysts say the European Union's new Solvency II capital regime is putting them under added pressure to move.

The rules, which come into force in 2013, bar European insurers from counting reinsurance policies towards their regulatory capital unless it is provided by reinsurers operating under a comparably rigorous regime.

Bermuda's regulator, the Bermuda Monetary Authority (BMA), is rushing to align its rules with Solvency II to avoid a potential mass exodus of reinsurers.

Most analysts expect the BMA's makeover to succeed, but the consequent regulatory tightening could itself make Bermuda less attractive to future generations of start-up reinsurers.

"Because of Solvency II, Bermuda's regulation is rapidly improving, so that's going to cease to be a relative advantage," said Luke Savage, finance director of the Lloyd's of London insurance market.

"There are a number of Bermudians who are already choosing to redomicile."