“It would be so nice if something made sense for a change,” says Alice in Alice in Wonderland. Did you realize she was actually an insurance broker? (Well, maybe not.) Brokers, like Alice, can’t make any sense of change, especially the country-by-country regulations that they have to navigate for multinational clients. Brokers face a daunting challenge to put together the most efficient global program possible while satisfying the countless local laws and regulations.
Expanding globally is a great way for a business to grow, but it also means dealing with a host of new risks to the business’s property and people located outside its home country. Depending on the number of countries in which it operates, a multinational can face hundreds of new exposures. Whether a company operates in one foreign jurisdiction or many, it’s important to have the right insurance program with the right limits and covers in place to protect its assets.
Global insurance programs can help a business protect its subsidiaries and affiliates, but there are obstacles to making a program work effectively. Each country has its own regulations for placing insurance and paying taxes. These rules vary widely from jurisdiction to jurisdiction, potentially creating gaps in coverage and a patchwork of local and global policies to cover all of a multinational’s bases. Finding adequate coverage and complying with local regulations require close communication among the parties involved: the insured, the insurer and the broker who ties it all together.
To cover a company’s exposures for its foreign subsidiaries, brokers can put together local stand-alone policies, which meet local requirements and limits. Stand-alone policies make sense when there are only a few exposures in a limited number of countries. For more complex, worldwide risks, brokers might prefer to go with a master policy to cover the parent company and wrap around local policies for its foreign subsidiaries. Examples of global coverage include global property, difference in conditions, difference in limits, umbrella liability, directors and officers liability and errors and omissions.
Master policies can help deliver what the buyer wants most: efficiency, consistency and cost control. For the insured, the goal is to have the broadest coverage under a global policy and the ability to manage risks and have claims paid.
A master policy can help protect the parent’s balance sheet and fill in coverage gaps in the local policy. It also provides the multinational with greater consistency in the terms and conditions of its worldwide exposures, in handling claims and in managing its collective risks.
Putting together a comprehensive and compliant master policy is not for the faint of heart. Most nations restrict placement with “non-admitted insurers” and require policies to be placed in the domestic market. These restrictions don’t always take into account the often limited capacity of the local market to cover the risk needs of multinationals. If capacity isn’t available locally, then the global market has to be tapped.
Some of the nations with the strictest non-admitted rules include Argentina, Brazil, India and China. The United Kingdom and Singapore are more liberal and allow local risks to be placed in the non-admitted market. The United States and Australia generally permit non-admitted insurance but require specific procedures to be followed and taxes to be paid.
The penalties for non-compliance can be stiff. In China, anyone engaging in an illegal activity can be subject to a fine of between one to five times the value of any gain made from the transaction. A broker who places business with an unauthorized foreign insurer is considered to be operating an illegal business in China and is subject to the same penalties as an unauthorized insurer.
In Argentina, fines can be as high as 25 times premium for a violation of its non-admitted rules. In addition, the policy may be voided, and a company’s directors and officers can be held liable.
Complying with insurance premium and other taxes is another matter. If the transaction is not done correctly, paying local taxes may not be possible. If the taxes aren’t paid, the tax authority can go after anyone involved in the transaction: the insurer, the broker and the insured. In these tough economic times, tax authorities are looking for revenue anywhere they can find it and are cracking down on taxes owed on insurance placements.
A good resource for tracking taxes worldwide is a tool, offered by TMF VAT & IPT Services, which calculates the taxes owed on multi-country risks. Council members receive a 20% discount on the tax calculator.
Master policies for multinational risks make good public policy sense, but the regulatory world isn’t yet structured to accommodate the insurance needs of businesses expanding internationally. Risk managers, brokers and insurers must work together to educate policymakers and regulators on the value of global programs to growing businesses and find a way to allow these efficient programs to be used across borders.