Bermuda faces a number of threats to its supremacy as a global insurance center, including a potentially “catastrophic” challenge in Congress to its relative tax advantage, the U.S. consul general warned in a speech to underwriters here.

Gregory Slayton, speaking last week before the Professional Liability Underwriting Society's annual Bermuda conference, also said the island needs to upgrade its regulatory and public school systems, going so far as to predict that unless problems in local education are corrected, the “social cohesion” of Bermuda could be at risk down the road.

On the tax controversy–fueled by complaints from a number of U.S. carriers, most vocally by W.R. Berkley Group–Mr. Slayton said that “Congress is asking why this business isn't back in the United States.” He noted that one reason for the migration of risks to the Bermuda market is the island's tax advantages.

Citing pressure on Congress to level the playing field, Mr. Slayton predicted that “any change in tax legislation could be devastating, even catastrophic to Bermuda.”

However, the leaders of Bermuda-based insurance firms downplayed the tax controversy during the PLUS meeting's concluding panel, “View From The Top.”

“You never know what provisions Congress will slip into legislation at two in the morning,” said Michael Butt, chairman of Axis Specialty Ltd. “But we are closely monitoring the debate, and I am not losing any sleep over it at the moment.”

Adding that the island's tax advantage is being overblown, he said that “Bermuda is not a cheating machine. We add real value in the value chain. We provide tremendous capacity and innovative solutions to the U.S. market. No one should forget that.”

Meanwhile, Mr. Slayton also encouraged Bermuda to continue to upgrade its insurance oversight system. “Strengthening the regulatory environment is absolutely critical,” he said, adding that “while change won't be easy–those who like the status quo will resist it…The risk of failure would be great.”

He praised Paula Cox, Bermuda's deputy premier and finance minister, after she promised in a brief welcoming speech immediately preceding Mr. Slayton's appearance at PLUS that her government is continuing work to bolster “solvency oversight and mutual recognition.” She added that “we can never afford to be complacent” when it comes to regulatory diligence.

Mr. Slayton also urged Bermuda authorities to reform the public school system, warning that if shortcomings in local education are ignored, the island “runs the risk of losing its social cohesion.”

However, the consul general also conceded that one big reason Bermuda draws so much insurance capital away from the United States is the inefficiency and cost of the multistate U.S. regulatory system.

Describing himself as a former “high-tech venture capitalist,” Mr. Slayton said that “if we had a technology commissioner in every state, we wouldn't have a thriving high-tech industry today.” Thus, he added, “the challenge to the U.S. it to get its own [regulatory] house in order.”

Noting that he and the rest of the Bush administration will be handing over power to a new president next January, his comments implied that continued Republican control of the White House might be best for Bermuda.

The “pro-free-market, pro-free-trade, low-tax stance” of the Republican candidate, Sen. John McCain of Arizona, would “serve Bermuda well,” he said.

While praising the Democratic candidate, Sen. Barack Obama of Illinois, as “innovative and inspirational,” he said his more restrictive positions on free trade makes it “a bit harder to see how well Bermuda would fit in.”

He warned that “it's easy to be fooled by Bermuda. It's a small place with a tiny population”–including some 8,000 American citizens, making up about 10 percent of the population. “But it's a huge player in the financial services market.”

Special Reports /

U.S. Consul General Cites Tax Challenge, Other Threats To Bermuda's Market

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