HAMILTON, Bermuda -- The new building up the road from the cruise-ship dock is the most visible sign that international business has eclipsed tourism as economic king in Bermuda. The Bermudiana Hotel, where U.S. President Woodrow Wilson once slept, has been razed. Under construction in its place: future headquarters of two major reinsurance companies, X.L. Capital Ltd. and Ace Ltd.

The project frames a prosperous picture of this lush island in the Atlantic Ocean. By attracting U.S. insurers with its lax regulations and low taxes, Bermuda has achieved what many small countries long to do: In less than two decades, it has transformed itself by reducing its dependence on tourism and building a healthy, white-collar economy.

But beneath the glistening facade, trouble is brewing. Some of the 60,000 residents of this 57-square-kilometer island, which sits about 1,100 kilometers east of the southern U.S., are struggling to adapt to a computerized world of number crunching. While insurance has created jobs, the most coveted senior positions go to expatriates, creating cultural, economic and racial rifts that contributed to the 1998 ouster of Bermuda's conservative leaders after 35 years.

"Many people feel they are being overlooked for the top jobs in international business," says Jamal Hart, 31 years old, who bypassed his father's parasail business by getting an accounting degree at American International College in Springfield, Massachusetts. He works for a telephone company, and dreams of someday hopping to a better-paying job in the insurance industry.

Responding to such concerns, Bermuda's Progressive Labor Party has made it harder for foreigners to get work permits and proposed limiting to nine years the time they can stay here. Already, they are barred from buying homes that cost less than about $2 million; as a result, most live in rented accommodation.

The crackdown has alienated some employers. William Williams, who manages $10 billion of investment-grade bonds, says hiring delays drove him last July to move his firm back to Santa Barbara, California, after six years. Of 22 employees, three were Bermudan. "The new government made it difficult for us to get work permits and hampered our ability to attract long-term candidates," Mr. Williams says. "There was obviously going to be interference with our operation going forward."

Despite the discontent, Bermuda remains prosperous. While its robust economic growth slowed to 2% in its fiscal year ended March 31, there is virtually no unemployment and the island maintains one of the highest per capita incomes in the world.

"Anyone who wants a job has one," says Raymond Russell, president of Bermuda's labor union. "We are a lucky little country. A lot of places would love to have our problems."

Becoming an insurance hub is just the latest economic makeover in Bermuda's history. Founded by shipwrecked sailors in the early 1600s, it crossed from buccaneering to farming, earning world-wide fame for its onions. But as its farmers became stymied by steep tariffs and competition, Bermuda marketed its pink-sand beaches and coral reefs to become a tourist hot spot, wooing the likes of Eleanor Roosevelt and Mark Twain, who romanticized it as "the right country for a jaded man to loaf in."

Tourism remained the main economic engine until the mid-1980s, when the industry began to suffer as less-expensive destinations with year-round beach weather beckoned American vacationers. "Did you even hear of Costa Rica 10 years ago?" asks Bermuda Tourism Minister David Allen. Indeed, the number of visitors here has dropped by about a third during the past decade to 300,000. The last new hotel, the Fairmont Southampton Princess, opened in 1973. Club Med and Marriott both closed resort hotels here, saying they couldn't afford to operate.

Fortunately, just as tourism began to soften, insurance began to take off when Robert Clements, then president of Marsh & McLennan Cos., persuaded 34 corporations to set up their own insurance company in 1986. His brainchild, Ace, was followed by hundreds of reinsurers, or wholesalers who offer insurance to other insurers, along with catastrophic and captive reinsurers -- created by corporations to insure themselves.

Today, insurance companies, money managers and other international businesses, with assets of $116 billion, collectively contribute more money to Bermuda's economy than any industry. These businesses also are the second-largest employer, with 3,191 jobs, compared with 3,473 for tourism.

Bermudans hold about 80% of all international-business jobs on the island, but few of the best-paying ones. The problem, for many Bermudans, is that they don't have the right training or background for these positions. "The new business is about networking and intellectual capital," says Joe Babiec, a consultant at the Monitor Group in Boston, who was hired to help boost tourism. "It's unprecedented here. You just can't take a bellhop and turn him into an insurance underwriter."

An Ace spokeswoman adds, "On an island of 60,000, it's difficult to find all the skills and experience we need." Of the company's 230 Bermuda-based employees, 75% are Bermudans.

Adding to the frustration, the guest workers who fill most of the senior jobs happen to be predominately white, while 70% of Bermudans are black. "The new economy has brought to the surface at least the perception of racial inequity," says Calvert Smith, a member of Parliament for the Progressive Labor Party and head of the island's credit union.

In hopes of getting better jobs in financial services, Bermudans whose families have worked in tourism for generations increasingly are getting degrees abroad and attending new insurance courses at the island's two-year college and a new insurance institute funded by major insurers. Still, many say they are relegated to ancillary and low-level jobs. When Ronnie Burgess lost her job as a Marriott Hotel switchboard operator, she combed the international-business market. "The best I could find is a temp job," she says. So she settled for answering phones at a doctor's office.

In some ways, the growth of the insurance industry has widened the economic disparity here. Expatriates, with paychecks big enough to allow them to dominate waterfront homes and private schools, are driving up costs on the island. And they often pay $10,000 a month or more for rent.

"The government became lackadaisical about tourism and was not preparing locals to work in the new business they were growing," says Cromwell Shakir, who runs a barbershop. "The new economy has left many people behind."

The tension, and the government's decision to become more parsimonious with work permits, has some worried that the island's insurance industry's continued growth can't be taken for granted. Countries such as Ireland, with an abundant educated work force and lower costs of doing business, are actively wooing insurance companies. Competing offshore jurisdictions could become more appealing for insurers if they shed bank-secrecy laws that give them a dubious reputation, which Bermuda has avoided.

"Unlike factories or hotels, international businesses are collections of people with knowledge of information that can be applied to any problem anywhere around the world ... it would be easy and cheap for them to go" if Bermuda became unattractive for foreign businesses, says Robert Stewart, who recently retired as head of Royal Dutch/Shell Group's Bermuda subsidiary and now works as a money manager.

If companies go elsewhere, it would be hard to replace any lost jobs. As a result, Mr. Stewart says he is starting to wonder how long the premise of his new book will last. Its title: "Why Bermuda's Economy Works."