New concerns for international insurance programs
Jurisdictions looking for tax revenue may go after local affiliates
By Michael J. Moody, MBA, ARM
Corporate insurance buying is becoming more challenging with each passing year. Emerging risks from a wide variety of sources have become a daily routine for many corporate risk managers. Over the past few years we have seen dramatic increases in risks like cyber liability, directors and officers liability and other professional liability risks, to name just a few. The insurance industry has, for the most part, responded with new and innovative insurance services and products.
One of the most challenging areas has been the risk associated with multinational insurance programs. Not that long ago, international insurance programs were the exclusive domain of Fortune 500 corporations. However, the rise and growth of international commerce has now resulted in many small- to mid-sized commercial accounts requiring similar comprehensive, properly designed multinational insurance programs. A new report from ACE Group, titled Structuring Multinational Insurance Programs, notes that one of the most important considerations in designing a multinational insurance program is how to effectively handle the evolutionary regulatory environment that is continuing worldwide.
According to the report, traditionally risk managers have focused on whether local jurisdictions would permit insurance to be provided from an unlicensed insurer to accommodate local risk. The report notes that regulatory developments are not limited to concerns regarding increased scrutiny of insurance companies, but they also encompass both the local insurance broker and local affiliate of the parent insured. Currently, many multinational companies are potentially unaware that their global insurance programs may be subject to compliance challenges in certain jurisdictions, the report warns. Among the possible effects of the heightened scrutiny may be "unanticipated reputational, tax or other financial repercussions as the results come to light."
The report emphasizes that a greater understanding of the transactional elements of cross-border insurance must be first and foremost in any program—including the need for increased clarity and transparency of documentation as well as providing advanced preparation for managing and executing uncertainties.
The traditional approach
Historically, ACE notes, the primary purpose of "multinational insurance programs is to maximize global insurance capacity and minimize insurance cost," all while "maintaining central control over the risk management and risk transfer practices of individual subsidiaries." In this way, multinational insurance programs "can offer a consistent, global approach to coverage, terms, conditions and financial limits when augmenting the ability to consolidate needed coverage." Overall this process can enhance loss control practices and procedures while minimizing exposure to loss.
The use of a non-admitted insurance in the global insurance program provided a cost-effective alternative to local coverage. However, recent changes, notes ACE, have cast doubt on this continuing practice. "Today some countries allow non-admitted insurance, while others do not." In between those extremes "regulations in some countries allow the use of non-admitted insurance but subject to certain conditions." The regulations may include such provisions as "prior approval of regulators, specific regulations of existing insurance and, of course, payment of insurance premium taxes locally."
A traditional approach to the non-admitted insurance issue was to arrange coverage in one country, often the domicile of the parent organization, for insuring exposures in other countries. In these cases, no local policy was issued, essentially freeing the insured from paying local premium taxes. For the most part, "this has resulted in many multinational regulators voicing concern about premium taxes." This is significant since it posits a desire to enforce local insurance laws as well as increase tax sources and "in the long run, places the local affiliate of the foreign company in the crosshairs of the local government," says ACE.
Clearly corporations that violate these regulations, whether knowingly or not, will begin to face reputational harm as local regulators continue to move forward with this challenge. Thus, due diligence on the part of the international corporations and their brokers is required prior to structuring a multinational insurance program. Bottom line, it is no longer adequate to just determine if a non-admitted insurance policy is permitted in the country.
In order to illustrate this point, ACE presents results from three recent noteworthy enforcement actions. The first of these examples is India, where recent regulatory enforcement proceedings have questioned the efficiency of parent countries' policies in context of whether local coverage was adequate. The use of a global master policy, which had been the primary approach used by a German-headquartered company, was ultimately taxed on a $10 million settlement under a property program. It should be noted that "the master policy was written by the parent company outside of India and the claim was paid outside of India." Once the local tax authorities became aware of the settlement, India's tax department subsequently launched an investigation. Indian authorities have now "been able to easily redefine the entire transaction as a local purchase," and impose applicable taxes, fines and other penalties on the local affiliate.
A second example from the publication analyzes the improper use of independent procurement authorization in the United States. Information provided by ACE notes that U.S. regulators have not hesitated to challenge what they see as abuses of non-admitted privileges used by insurers, insureds and brokers. This particular situation "occurred in a case in New York State and presented different implications for the global risk management community that are using a local insurance broker to lend the appearance of compliance to the authorities." This case involved a situation where a contractor was domiciled in the United Kingdom and not licensed in the state of New York.
The enforcement of this case focused largely on the responsible parties to include the local broker, as well as the local insured. Ultimately, the compliance question was not only how the unlicensed insurer sold non-admitted insurance but, as it turns out, also because New York has direct state jurisdiction over local insureds and brokers. State regulators were quick to move past just the insurance company to include both the local affiliate as well as the local broker.
A final example from the ACE report involves actions by Brazil against a multinational insurer and the brokers representing it. In this case regulators exercised their discretion to go after local entities rather than the foreign insurer. The case involved a large international life insurer that was charged with conducting business in the country without a license. The large insurance company, which was based in Texas, was illegally selling life insurance in insurance in Brazil over a period of several years. It was quickly proven that the large life insurer did not have a proper Brazilian insurance license. Further the regulator found that the sale of improper insurance in part was due to the use of what it called "irregular" brokers, "who themselves lacked proper licensing to sell insurance." For the most part, policyholders were unaware that the transaction was in violation of the country's insurance regulations. From this case it's easy to see that "while the local regulator may not otherwise have direct jurisdiction over a foreign insurer, the presence of local representatives may be enough to bring the insurer into the local regulatory net."
Historically, multinational corporations have used the purchase of the master Difference in Conditions (DIC) policy in the name of the parent company, and done so in the parent company's jurisdiction, that is excess of the local policies and is provided to protect for local enforcement actions. However, according to ACE, at this point "it's easy to see there are many nuances to the purchase of such a policy." Parent companies must "determine whether to include certain affiliates as named insureds in the policy or solely itself as a named insured."
ACE notes that there are several steps that risk managers can take to assure that their "master policy effectively responds to the regulatory and tax challenges" in the countries where these new restrictions apply. In addition to issuing local policies, they note risk managers and their brokers should:
• Obtain a master policy that specifically excludes any of the affiliate locations that are in countries that have questionable non-admitted requirements.
• Make sure that the parent's insurable interest of the excluded affiliates is "consistent with the laws of the parent company's domicile," so that the transaction matches the coverage.
• Remit premium taxes paid under the master policy, so if a covered claim should occur, documentation would be reflected between the parent and the affiliate.
• Utilize inter-company charges and appropriate documentation based on actual experience of the affiliate so that the cost and benefits "can be charged to the appropriate entities in a transparent and materially compliant manner."
Without question the regulatory constraints issued by some international jurisdictions relating to local tax and insurance regulatory requirements necessitate significantly comprehensive reviews. Corporate risk managers need to be aware of relevant regulatory regimes for each jurisdiction.
The parent organization must consistently monitor application of insurance law worldwide, so compliance analyses of local regulations governing non-admitted insurance are current and being used to determine proper coverage. This will require that the risk manager and the insurance broker for the multinational company take steps to assure that both the broker and his or her client are in regulatory compliance.
This is an issue that will continue to grow over time as more and more regulators look for additional taxing sources. While this is a challenging situation, it should not necessitate the dismantling of the existing international insurance program, but rather tweaking of the specific program details. Brokers who have clients with multinational insurance programs should consider a proactive response to this changing situation by providing a detailed review and analysis of these programs before adverse effects come into play.