The simple guide to the pros and cons of non-admitted insurance

For many years, global programmes included a large element of non-admitted insurance around the world, taking advantage of the ‘grey area’ in regulations in many countries. However, in recent years there has been a tightening of regulations by supervisors in most countries, and risk managers are increasingly concerned about compliance. As a result, local policies are now a high priority. This does not mean non-admitted insurance has become obsolete – far from it – but its acceptance is starting to become more black and white.

Advantages of non-admitted insurance

1. Uniformity of cover
It is much easier to ensure that there are no gaps in cover across the whole group with non-admitted insurance, as well as no overlapping insurance.

2. Broader coverage available and higher limits
Non-admitted insurance means the parent can dictate the level of cover required in each class, as well as the conditions of the cover, ensuring a uniform level and scope of cover worldwide.

3. Policies in one language
A non-admitted policy can be written in the language of the parent company and include common wordings and clauses to ensure that the cover is the same worldwide, as well as being easily understandable and leaving less room for errors or omissions.

4. Cost savings
Cheaper premiums should be available through bulk buying, economies of scale, and pooling of retentions.

5. Security/choice of insurers
The choice of non-admitted insurer is clearly much greater than for a local admitted insurer.

6. Contracts may be enforceable in parent territory
Contracts may be enforceable in the parent territory, allowing any disputes to be heard in a court in the parent’s home territory, rather than the territory in which the subsidiary or local operation is based.

7. Unified claims handling
Claims can be paid to the parent company, giving the parent control of the funds to use how it wishes.

8. Central control
Non-admitted insurance gives much greater central control, allowing the group risk manager to coordinate the insurance programme more easily.

Problems with non-admitted insurance

1. Illegality
The biggest disadvantage with non-admitted insurance is that it is against the law of the country in many jurisdictions. In most countries it is still illegal to use non-admitted insurers, at least for some classes of insurance. In some cases, non-admitted insurance is illegal for compulsory classes, but otherwise permitted. Sometimes, while non-admitted is not permitted, specific policies can be issued on a non-admitted basis. And sometimes, non-admitted is illegal unless the local insurers are unable to provide the required cover. Penalties can consist of severe fines and, in some cases, even imprisonment for local directors.

2. Financial penalties applied
Where a market allows the use of non-admitted insurers, there may be penalties attached to the purchase of insurance from such carriers. For example, a local service charge may be added, or a tax may be added, for non-admitted insurance. Often, non-admitted insurance is liable to premium tax, and a higher level of premium tax may be charged.

3. Premiums may not qualify for tax relief
One major disadvantage is that non-admitted premiums may not qualify for tax relief. Where premiums are paid to an unlicensed insurer, the transactions may not be considered as insurance and the local revenue authority may decide not to allow the premiums to be tax deductible.

4. Currency fluctuations may mean that claims payments suffer an exchange loss
Another problem with using a non-admitted insurer relates to claims payments. If a non-admitted insurer is used, the claim will be paid to the parent company or the subsidiary. When the payment is made to the subsidiary by the parent or the insurer, it will be converted into the local currency, which could result in an exchange loss.

5. Claims may be viewed as unearned income and subject to tax
More seriously, the claim payment could be viewed by the local revenue authority as unearned income rather than an insurance claim, and therefore be subject to tax.

6. Loss of control when it comes to local service, assessment of risk and claims investigations
While a non-admitted programme may improve the central control of the insurance and risk management programme for the parent and the group risk manager, it can mean a loss of control when it comes to local service, assessment of risk and claims investigations. Assessment of risk and claims investigations are clearly much more difficult where there is no local insurer and, in some cases, where there is no local broker.

7. Restrictions on policies
Even where non-admitted is allowed, there may still be restrictions affecting a policy, such as restrictions on loss-adjusting activities that can cause significant delays in claims settlements.