Martin Strnad – Essential ingredients for a global non-admitted insurance business data base
The first warning shot was the ‘Kvaerner Ruling’ by the European Court of Justice (C-191/99) confirming The Netherlands’ view that premium taxes were owed to the Dutch tax authorities, even though the entire insurance arrangement was agreed, stipulated, paid for and transacted outside the Netherlands.
The only touch point with the Netherlands being that the named, and thereby also insured, exposure was deemed to reside in the Netherlands. According to interpretation under Dutch law, and not the law of the country where the insurance was issued, the risk resided in the Netherlands. This is an important point to remember in order to better understand the concepts outlined in this article.
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What’s the situation in the market today?
For many months now, international symposiums have been filled with risk managers, brokers and underwriters, interested in hearing experts discuss the topic of regulatory laws on cross border authorisation, payable taxes, possible penalties and other consequences. There is an overwhelming agreement about the need to ‘get it right’ and to be ‘compliant’, when structuring, buying or engaging in cross border insurance, be it as an insured, captive, insurer, broker, risk engineer or loss adjuster. And there seems to be a widespread agreement on the need to have a comprehensive database containing all the necessary information about all relevant foreign countries’ requirements.
That’s about as far as it goes though, in terms of consensus in the market. When it comes to discussing the core of a solution, which is the creation of a global requirements database, there is not much agreement amongst the parties. This article discusses how a practicable global database could be structured.
Looking at the task
The goal should be market access to an internet-based database informing market participants of the various legal, regulatory and tax requirements applicable to all the parties involved in structuring, and transacting on, an international programme.
The first important thing to understand is that there is a lot of country specific information to trawl through and legal opinions to be understood.
The various parties craving information will not have time to read extensive legal texts. They will not engage in opening files reproducing the Brazilian, Indian or Chinese insurance laws, nor will they be interested in fighting their way through multi-claused and heavily caveated legal opinions.
A database operating on the basis of copying legal text into individual country information would have no uptake, as underwriters, brokers and risk managers will not invest their time into interpreting such information, when still running the risk of potentially interpreting a country’s requirements incorrectly.
To help all parties make timely, market and deal-relevant decisions, when structuring an international programme, the global database would need to be structured to provide clear information upon which decisions can be made. What does this entail?
Let’s run through an example. An underwriter or broker should easily be able to answer the question: is it possible to structure a deal to cover an excess layer of business interruption insurance for an exposure residing in Bulgaria on a non-admitted basis? If the answer is ‘yes’, then the database should provide answers to the most important information requirements, e.g.:
– What insurance premium taxes or other levies should be remitted to Bulgarian tax authorities based on the provision of the excess BI cover as part of a wider global programme?
– Will the global broker be accepted as the intermediary for the local excess cover and if yes, does the broker owe any taxes to the tax authority?
– Will the insurer be permitted to collect premium from the buyer’s local subsidiary or would that change the admitted status of providing excess cover from abroad?
– Will the insurer be permitted to employ a third party loss adjuster or otherwise handle the claim in the case of an excess BI loss or would such activity trigger the need to get a licence or other sort of authorisation?
– Can risk engineering be conducted regarding this non-admitted excess BI cover by the insurer on a cross border basis or not?
If a database can provide the deal structuring-parties with answers to these and similar questions in a clearly structured ‘go or no-go’ fashion, then this should allow the underwriter, broker and buyer to structure an international insurance programme within the required time frame and with a sufficient amount of sustainability. The tools to perform such a structuring are well known:
– Issue local policies where non-admitted business is not permitted;
– Close gaps in cover by way of DIC/DIL clauses, where this is permitted, however check whether the DIC/DIL permitting country then still allows for premium collection or claim payments;
– Make use of the European freedom of services concept or other exemptions from insurer authorization needs, where the carrier has made the appropriate notifications to the competent regulators;
– Consider with the customer, which insurable interest they actually need to have covered: does the buyer prefer to cover the risks of their local operations, in which case local policies would be recommended? Or is it a preference to cover the central balance sheet of the buyer and the respective insurable financial interest into the investments or shareholdings into local operations? In the latter case, due care must be given to stipulating and also transacting the deal correctly so as to execute, and appropriately account for, a true financial loss protection to the customers’ holding company;
– Allocate and pay taxes appropriately to the different tax authorities as required.
To be able to populate a database with appropriately detailed ‘go and no-go’ answers to all key items required for any programme structuring by country, it is a prerequisite that the database can answer questions on very specific pre-defined fact patterns. It would, for example, almost seem impossible to send a question to a country’s regulatory law expert asking, whether ‘non-admitted business is permitted’ in their country or not. The question would be way too generic and most likely lead to a ‘no’.
The process of collecting the required information to populate a global database with questions and answers in a consistent fashion, based on a uniform understanding by the various data providers, e.g. local law firms or tax experts, is highly complex and intense. Before going out with the respective questions therefore, the fact patterns underlying the answers provided by the database would need to be pre-agreed and clearly defined by the parties owning and maintaining the database. Agreeing on these fact patterns will be the challenge for any entity, community, society or other group of individuals creating a global database containing the requirements for cross border business.
Such fact patterns can be summarized in generic Business Scenarios. The aim should be to create Business Scenarios that are specific enough to cover a certain market practice. On the other hand, they must be generic enough to cover a certain area of practice, such that the creators of the global database and their users do not have to go back to local experts for each single twist. The following Scenarios could take care of a multitude of structures under which cross border business is being provided and lend themselves as a basis for the questions that the global database would have to answer:
Business Scenario 1
Agreement on an insurance contract (e.g. master policy) between two parties residing in one and the same country. Individual foreign countries then could be asked whether under such agreement (which would, of course, be a foreign agreement from their own perspective), any local exposures residing within their own country can be named as insured on a non-admitted basis under the foreign master agreement. This Scenario is geared to cover international programmes without local policies.
Business Scenario 2
Similar to Business Scenario 1, only assume there is a local (admitted) policy in place to cover the local exposure within the researched jurisdiction. Can the gap between the local policy and the master policy be covered by means of DIC/DIL cover?
Business Scenario 3
Similar to Business Scenario 2, ask local experts whether an excess layer on top of the primary programme can be covered on a non-admitted basis.
Business Scenario 4
Similar to Business Scenario1, however the insured has no subsidiary in the location of risk with whom a local policy could be issued. Ask local experts, whether the local risk (e.g. a foreign owned warehouse) can be insured on a non-admitted basis.
Business Scenario 5
Whilst under Scenarios 1-4 contracts are being agreed between the insurer and the insured within the same country and all possible named exposures reside in foreign countries, Scenario 5 asks for the requirements for the direct solicitation of insurance business by the insurer across the border into the country of the insured. Can the insured registered in country A directly agree on an insurance cover for the insured residing in country B?
Many other scenarios could figure in the equation, e.g. ones that also take into account the requirements around facultative reinsurance cessions needed to provide for the money flow from local policies to pooling facilities, captives or also co-insurers or co-re-insurers. The scenarios, of course, need to be in relation to any transacted line of business and to any of the relevant global jurisdictions. To ensure data quality, consistency in the method of data collection and maintenance needs to be maintained.
The current situation is that there are a number of different databases used. Some of them operate on the basis of fact patterns as outlined above, others collect the more generic and broad legal information available from local jurisdictions. This may help better understand why different providers of international programmes have different answers to the question of what is required or at all permitted in the scope of international programmes.
If the aim is to have a market standard of cross-border insurance know-how, all market participants have to agree on one relevant database. And one relevant database can only be created if everyone can agree on the same set of questions that should be asked. Answers can only be obtained by way of formulating pre-agreed and aligned fact patterns (Business Scenarios), based on which relevant questions can be posed to local experts.