First time abroad? Key concerns around international programmes for the newly-international business – Todd Germano, Allied Worldwide Assurance Company

As most businesses take their first steps into overseas markets, they rely heavily on local advice on both counts, and tend to opt for a local solution; buying separate policies in different countries to cover specific risks. As they continue to grow, this can result in a patchwork of policies that lacks central control, consistency and cost-efficiency.

Almost inevitably, the next discussion for a growing business focuses on whether or not an international programme can deliver a more effective solution, and the pros and cons involved. There are four key questions that businesses need to ask as they step over that threshold.

What are the arguments in favour of creating an international programme?

An international programme can offer a consistent global approach to coverage terms, conditions and financial limits by using non-admitted insurance. This is typically arranged in one country – often the domicile of the parent company – to insure exposures in other territories. No policy is issued – or specific risks covered – locally. It may also be more competitively priced.

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Sounds like it is all upside. Where is the risk?

The key downside is that the legal status of non-admitted insurance varies from country to country. In some it is permitted, in others prohibited entirely while in some permission is subject to certain conditions or registrations. These can include prior approval from regulators, a specific registration of the existence of the insurance, use of a local placement broker and/or the payment of insurance premium taxes locally by the local insured or their broker.

To compound the problem there is almost no commonality, with each country varying on a case-by-case basis depending on the local regulatory bodies. So, it is possible that by participating in a non-admitted policy, a local subsidiary will find that it has violated local laws.

Is this a new risk?

The problem is not that the risk is new, but that local regulators are becoming increasingly active in their vigilance. This change of emphasis is being driven by a greater desire to enforce local insurance laws, as well as maximise any available tax revenues. This means that subsidiaries of foreign companies have a higher risk of scrutiny as potential targets of revenue enhancement.

An enforcement action in India provides a useful example of this. The subsidiary of a leading manufacturer of sporting goods headquartered in Germany suffered a fire in a warehouse in 2009. According to The Wall Street Journal, the parent company received about $20m in claims payments from a global master policy with an insurance company that was not admitted in India. The Indian subsidiary claimed that tax was not due because the policy was held outside India and the claim was paid outside the country.

The Indian tax department launched an investigation, concluded that the payments were intended to benefit the local subsidiary and recommend that it be taxed on the $20m claim paid to its corporate parent. This sort of challenge can be seen in other countries, and the consequences of being subject to these compliance challenges may be reputational as well as financial.

What steps should be taken to manage these regulatory risks?

For countries that either forbid non-admitted insurance, or impose different conditions, businesses can, at one extreme, decide to have all local policies to full limits where necessary, and pay all local taxes. This will result in perfect compliance but also increased costs. Other steps to be taken to ensure that the master policy effectively responds to the regulatory and tax challenges include:

• If your risks are located in countries that allow non-admitted insurance, ensure you understand exactly what conditions need to be met
• If the risk is “exported” to a non-admitted insurer, be clear about which entity is responsible for paying applicable premium taxes and other charges
• Issue a master policy to the parent company as the sole insured in its jurisdiction, and exclude any subsidiaries etc. in geographies that prohibit or restrict non-admitted insurance
• For the excluded subsidiaries, insure those risks with a policy that is consistent with the laws of the parent company’s domicile. This way, the location of risk is matched with the transaction of the business of insurance, i.e. the master policy is issued by a licensed insurer in the same jurisdiction
• Remit premium taxes on premiums paid under the master policy (if not exempted) in the parent company’s jurisdiction. If the parent remits the covered claim to a subsidiary, then there should be a clear communication trail between the parent and its affiliates.

The use of non-admitted insurance has some significant considerations which businesses need to consider carefully before implementing an international programme. However, the hurdles are not insuperable and, with an awareness of the issues and the support of their insurer and broker, a multinational programme can be constructed with the right documentation and supporting contractual arrangements that meets both compliance and risk management requirements.