Steering through the minefield

For corporate risk managers, purchasing internationally compliant insurance policies can cause a serious headache. In most countries companies are required by law to purchase insurance locally. If they do not, they risk prosecution. But the problems do not stop there.

Premium taxes have to be calculated appropriately according to where the risk is located. And claims payments could be subject to double taxation if they are not handled correctly.

In an effort to simplify these problems, some large insurers have spent time and money developing international networks, so that they can offer their services wherever clients need them. By partnering with local insurers they are able to provide blanket multi-jurisdictional insurance policies that are compliant with local laws. While these global insurance programmes help provide consistent coverage, they can be expensive and complex to administer. Risk managers thinking about purchasing one of these instruments should consider a number of things.

Financial regulation is under the spotlight. Regulators are increasingly looking at whether foreign companies comply with local laws. International regulatory cooperation is the flavour of the month. It was a key focus of the G20 when it met in London this year to discuss a coordinated response to the financial crisis. Many insurance regulators have entered into formal cooperation agreements. In January, the Qatar Financial Centre Regulatory Authority and Oman’s Capital Markets Authority began to work together on insurance supervision. And recently New York’s insurance regulator has signed similar agreements with Bermudian, German and Thai supervisory authorities.

Further, in the wake of the financial crisis, politicians are keen to show they are acting in the interest of stability. And that means the financial police are cracking down. A foreign company acting illegally overseas is the perfect target for a local regulator eager to flex its muscles and win popular support. The penalties of non-compliance with local insurance regulations vary; they consist of severe fines and, in some cases, the imprisonment of local directors.

There are recent cases in Senegal and New Zealand of companies receiving fines from regulators for breaking the law because they were not insured locally. With regulators poised to pounce, the risks of non-compliance have increased.

Admitted or non-admitted

The first thing to be sure of is that your international programme is legal in all of the territories in which it is supposed to operate, so that it will respond in the event of a claim. Yves de Mestier, network and development manager at AXA Corporate Solutions, recommends caution. ‘Generally, a conservative approach is best,’ he says. That means using admitted and non-admitted insurers only in the territories that will allow you to do so.

Locally admitted insurance contracts are usually issued by a domestic insurance company that is licensed in the country in which the risk is located. Generally speaking it is the safest way of buying insurance, because the cover will be tailored to the territory and compliant with local regulations. Claims are also more likely to get paid in full without any complications. On the flip side, insurers tend to congregate in the developed markets of the West. They may not have a big presence further afield. In these places the lack of a competitive domestic market can lead to higher premiums and make admitted insurance more expensive. There are very few countries that allow non-admitted insurance, but there are also several grey areas where no one really knows what is allowed.

With the exception of Europe, where the Freedom of Services agreement makes things easier, and a few exceptional jurisdictions that allow non-admitted policies, most countries will not allow insurance to be written inside their borders by a foreign insurer. This restriction poses a huge problem for European companies and their insurers looking to invest in other parts of the world. Overseas insurance markets are often not as developed as the older and more established centres in Europe and America, which means Western companies may not be able to find locally the quality of service and expertise they have come to expect in their home markets. This is an even bigger problem when it comes to issues around claims and complex types of insurance, such as directors’ and officers’ liability (D&O) or professional indemnity. D&O is a product of Western value systems and it may not be well understood elsewhere.

For these reasons, when risk managers are choosing a global insurance partner, the breadth of its international network as well as the strength and quality of its local partners are paramount. Buyers need to be sure that the insurer they choose has an international network that stretches to all of the countries in which they operate, or is willing to offer alternatives in the event that they do not. There are only a handful of carriers that are capable of dealing with the huge financial and administrative burden which these global policies entail. In the wake of the financial crisis, which has laid waste the balance sheets of many large firms, the number of stable and well capitalised carriers able to offer these burdensome programmes has diminished. However, while the choice on offer has been restricted, there are still some insurers in a position to offer global policies.

Difficult territories

While insurers have done their best to follow their clients and establish a presence wherever they are needed, there are some places that financial firms dare not go. There are a number of reasons why insurers may want to steer clear of certain parts of the world. It could be that there is a dearth of reliable local insurers to partner with, or an insufficiently robust regulatory framework. In other regions political instability could be preventing foreign insurers from making inroads.

“Some large insurers have spent time and money developing international networks so that they can offer their services wherever clients need them

Economic sanctions may also prevent financial firms from operating in some parts of the world. These are restrictions, usually applied by the United Nations, Europe or America, placed on certain regimes which they think run the risk of harbouring terrorists, or which present a security threat. Rules typically prohibit firms from making available economic resources or financial services to an entity on a sanction list.

Afghanistan, Belarus, Myanmar, the Democratic Republic of Congo, Iran, Iraq, the Ivory Coast, Lebanon, Liberia, North Korea, Sudan, Syria and Zimbabwe are all currently on one of these lists. They make the job of offering insurance in these states difficult. A company might need to be present in one or another of these dangerous places, but insurers may not be allowed to offer financial services there.

‘Coverage is not available everywhere in the world,’ explains De Mestier. ‘Insurers should have the courage to explain this to their clients.’ Chris McGloin, vice president of risk management and insurance for UK manufacturer Invensys, adds that, when implementing a global programme, China, India, Brazil, Nigeria, and the Middle East all proved difficult jurisdictions.

The risks themselves also vary between countries, meaning that standard policy terms and conditions are difficult to implement everywhere. Liability regimes vary depending on where you are in the world. The sheer number and complexity of systems can introduce huge challenges. The US has 50 different regimes alone. And Chinese regulators have a very different idea of what liability means from their American counterparts. This makes offering blanket global coverage very troublesome. It may be that a global insurer is unable to offer the level or type of cover required abroad. Again, the strength and quality of an insurer’s international network is key. The best insurers use internal rating models to assess the financial solvency and technical skills of their partners, so that they can reassure clients and explain to them why they must avoid certain countries.

Tax considerations

Taxation is a whole other issue – and one that Praveen Sharma, head of Marsh’s insurance regulatory and taxation consulting unit, will examine in detail in this special report. Briefly, two issues of contention are calculating premium taxes and handling claims payments. Working out the premium contribution that individual subsidiaries should be making and the corresponding tax is a huge sum and one that risk managers would prefer to leave to their advisers.

It is crucial that companies allocate the premium correctly and pay tax accordingly, otherwise they could open themselves up to law suits. A landmark ruling in 2001 by the European Court of Justice set a precedent for the whole of the European Union. Kvaerner, a multinational company, was fined by the Dutch tax authorities for not paying insurance premium tax (IPT) in the Netherlands. Kvaerner bought its policy from a UK-based insurer to cover all of its global operations, including a subsidiary in the Netherlands. The company paid the full premium in the UK and invoiced its subsidiary in Holland for a share of the premium. When the Dutch tax authorities found out, they billed Kvaerner for the IPT payable on the Dutch subsidiary’s share of the premium. Kvaerner objected to this, but the European Court ruled in favour of the regulator.

The decision is important because it set a legal precedent that meant that companies have to pay IPT in the jurisdiction where the risk is located rather than where the premium is paid. If they do not, they could be prosecuted on the grounds of tax evasion. In order to avoid this, a buyer must be able to identify the location of all its risks, allocate the appropriate share of premium for each risk and calculate the premium taxes accordingly. This is relatively easy for property programmes, because the risks do not move around and are relatively easy to quantify, but it is a lot harder for global D&O insurance, because directors do not tend to stick to the same location, and liability regimes differ widely.

Another thing to bear in mind when it comes to tax is how to reimburse subsidiaries in the event of a claim. If a local partner runs into problems, then it is in the best interests of the larger company to ensure that operation is up and running again quickly. But complications can ensue if a parent that only owns 50% of a local partner tries to reimburse that entity for 100% of the cost of a claim. ‘Joint ventures are a major challenge,’ McGloin adds.

Further, if a parent company is reimbursed in the home market for a claim made by a subsidiary in a foreign territory, it could run into problems when it tries to distribute that money. Local authorities might treat the insurance payment as a new capital injection and tax it accordingly. With no loss against which the payment can be offset at group level, the domestic tax supervisor could argue that it is technically income and therefore subject to income tax. Under these conditions a company could find itself paying more tax than it initially expected. To overcome this challenge buyers should insist upon a tax liability clause in their insurance contract, which reimburses the insured for an additional sum up to a certain limit to offset any taxes payable on the income.

Risk managers who are constructing global insurance programmes should consider all the issues discussed here. Careful consideration should also be taken when it comes to selecting an insurance partner to work with. It is important to assess the strength and coverage of their global network. If they do not have operations on the ground, they will not be able to issue a policy or handle claims. Lengthy discussions with your insurer and good communication are essential to iron out all of the issues. Fortunately the insurance industry has made some big improvements in the way it does compliance. Following all the rules everywhere is a huge challenge, and requires a massive amount of time and effort, but it is not something risk managers can afford to shy away from. n

Nathan Skinner is associate editor of StrategicRISK