The increasing number of mega multinational corporates with large asset bases in multiple countries has necessitated the advent of a centrally administered global insurance programme. Designing a global insurance programme that provides comprehensive cover along with providing efficiency, cost effectiveness is necessary. The programme should entail a coherent strategy and an in-depth understanding of the operating conditions in each of the countries as well and also be linked to theprevailing regulatory and tax environment. Global insurance programmes can be beneficial to the large corporate as it offers optimisation of the covers and the costs, uniformity in risk management & transfer practices, enhanced loss control practices andan efficient accumulation of loss data and a consistent approach to the coverage terms and conditions & financial limits.
Non admitted insurance is a cost effective alternative to local insurance policies and are an integral part of any centrally run global insurance programme. Non admitted insurance is a policy issued in one country that covers the assets against exposures in the country of operation. The policy is neither issued nor is the risk covered locally. This may be either in the form of a standalone policy or may be a part of a global programme.
There are a few classes of insurance that are exempted from the rules and regulations governing non admitted insurance. These insurances are normally those whose risks transcend geographical boundaries, are written in an international format and follow globally accepted standardised practices like marine, overseas travel policy among others. Certain specialised lines of insurance whichare not available in a particular country may be permitted on a non admitted basis. In countries where non admitted insurance is not permitted, the governments benefit from increased revenues by way of taxes, enhanced ability to supervise and enforce locallaws. With governments across the world looking at maximizing revenues by way of taxation, constructing a global insurance programme merits a clear understanding of the local tax laws. In 2009, there was a fire at the Adidas warehouse in India. Accordingto reports, Adidas AG received $20 million while Adidas India Marketing (P) Ltd received $10 million towards the settlement of the claim. According to Adidas, since the premium was paid by Adidas AG towards a global insurance programme, the claim receivedoverseas was not taxable. However, the department of taxes opined that the claim received belonged to the local unit and should be taxed.
Non admittance is also a potent mechanism for growing insurance markets to develop and build underwriting capacity, expertise and experience. For emerging markets, the only mechanism to create and maintaina domestic insurance capacity is to dissuade the insured from obtaining a policy from a foreign market. This is despite the fact that the insured would prefer to deal with mature and experienced markets. More often than not, the insured ultimately pays ahigher premium than what is being offered in the global markets. In many cases though the local markets might not have a ready capacity and expertise for writing risks being offered, these risks are insured under back to back reinsurance arrangements withlittle or nil retentions. Here the insurer may choose the risk category and the quantum that they want to retain/reinsure. This also provides valuable exposure to the underwriters on underwriting practices, claims procedures, reinsurance practices eventually leading to the development of local capabilities and capacities.
There are some countries where non admitted insurance is permitted or permitted subject to the payment of the applicable taxes and duties. Towards this most of the insurers have a mechanism in place to pay the relevant taxes in other jurisdictions. In some countries like India, non admitted insurance is not permitted. However the same kind of clarity does not exist in all geographies. There are also a few countries where the tax authorities and the insurance regulations are at conflict with each other. For example, the insurance regulations may stipulate that non admitted insurance is not permitted yet such insurances may be completely acceptable under the tax laws as long as the relevant taxes and duties have been paid. In the rest of the countries, the laws are silent on the issue.
As far as claims are concerned, they are normally paid through the local policy. However in the case of a non admitted paper, there may be some complications in the receipt of the claim payments depending on the local tax and insurance regulations as seen in the Adidas case. The claims on a non admitted policy may be paid either in the country where the master policy has been issued or in the country where the loss has occurred. However if the non admitted policy has been issued in violation of the local laws, these receipts may be subject to taxes, fines and/or penalties. Moreover where the claim has been received in the home country, remitting the money to the country where the operations are located may be another challenge. Such remittances usually take the form of either recapitalizing the subsidiary or an inter company loan.
Where taxes are concerned, the post tax costs of insurance would normally consider the costs of fronting the policy in the relevant country and whether such costs are allowed as an expense. In some countries, the costs of insurance are considered tax deductible subject to the relevant taxes having been paid. Some holding companies may choose to pay the premiums for a subsidiary located overseas as part of amaster global programme. In such cases, the relevant costs of insurance are allocated to the subsidiary concerned. Such allocation of costs, its methodology and the costs being subsequently allowed as a deduction under tax laws may attract scrutiny. Henceit’s extremely important that this activity is carried out judiciously. Another factor that should be considered while drafting out the insurance programme is the expected frequency of the claims – if the insurance is likely to be very active onthe claims front, its advisable to buy a locally administered insurance where the underwriters are far more conversant with local operating conditions and the programme is compliant as well.
In conclusion, there is no specific solution that may be uniformly applied to all such situations. The intensifying global regulatory environment has made it increasingly difficult to insure risks in a consistent and a cost effective manner. Moreover, any run in with the regulators or the taxation authorities alsopose a reputational risk to the company concerned. While one may choose to buy all the policies locally with full limits having paid all local taxes applicable, such kind of a programme may turn out to be inefficient and expensive even though this would ensure complete compliance with regulations. For instance in the European Union, Euro policies issued in one country is valid across all countries subject to the payment of local taxes thus making policy administration simpler. Most corporate normally use anappropriate mix of partial solutions.
Whatever be the approach, it is recommended that the risk managers ensure a comprehensive due diligence while designing the global insurance programme.