Multinational Insurance Programs: evaluating the risks – David Halperin

A global policy enables the company to assess its risks and insurance needs centrally, and provides consistent terms, conditions, limits and umbrella attachment points for the company’s operations worldwide. It is often written on a “difference in conditions/difference in limits” basis, meaning it serves as a backstop for all of the local policies, providing coverage if a claim is either not covered under a local policy or the local policy limit is exhausted. Because the global policy usually has a worldwide coverage territory, it also covers risks in countries where there are no local policies.

Local policies are issued by locally-licensed carriers to insure the company’s local operations. These policies are tailored to local industry practices and regulatory requirements, provide access to local reinsurance pools, fulfill local contractual obligations, and as discussed below, afford a vehicle for local claim servicing and local claim payment.

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Claim servicing – the need to respond locally

Notwithstanding the benefits a CMP provides, a company may sometimes choose not to have a local policy in a given country, and instead rely on a global policy to cover those exposures. However, if there is a loss the carrier on the global policy may not be able to provide essential insurance-related services locally because it is neither licensed nor conducting business in the country where the loss occurs. It may be prohibited by local law from providing local claim services. Even if it is not prohibited, a global carrier may refuse to undertake activity in foreign countries due to legal and regulatory constraints.

This may pose serious concerns. Suppose a company’s Southeast Asian subsidiary owns a factory, and a chemical explosion causes significant damage to the facility. While it may take time to quantify the loss, a bevy of loss control experts, engineers, and investigators will be needed to conduct forensic analyses and facilitate the release of insurance proceeds vital to the local operation’s financial survival.

Assume that the factory does not have a local property policy in place and that coverage for the loss is being sought under a global property policy negotiated and purchased by the parent company in Mexico from a carrier licensed and operating only in Mexico. Because the carrier’s license and operations are confined to Mexico, it may not be able to undertake any claim-related activities in Southeast Asia or retain a third-party to do so either. The subsidiary may be left to service the claim itself – locating and engaging all necessary engineers, adjusters and experts, in-country or elsewhere, to investigate, analyse and adjust the property damage and time element aspects of the loss.

Let’s apply this hypothesis to casualty insurance. Assume that 25 individuals sustain bodily injury from the factory explosion. They sue the subsidiary, alleging negligence in maintaining the factory in a reasonably safe manner. Here again, the factory does not have a local policy in place to respond to these allegations. Instead, coverage will be sought under the parent company’s global liability policy, also purchased in Mexico from the same carrier.

Once again, the carrier may not be able to undertake any local claim-related activities or retain a third-party to do so. The subsidiary may need to retain local counsel to defend these claims. Moreover, if the country has a less developed legal system, the subsidiary is likely to have difficulty identifying and retaining appropriate counsel. Due to conflicts of interest and other legal considerations, multiple law firms may need to be retained.

Due to limitations on a global carrier’s ability to respond locally, a company and its subsidiaries may be in the unenviable position of responding to claims on their own. The best way to manage losses and claims locally is to have local policies issued by a global carrier’s local affiliates as part of a CMP. That way, coverage will be provided by a carrier located, licensed and operating where the loss occurs.

Claim payment – tax liability

Claim payments made by carriers located and licensed outside the jurisdiction where the claim occurs may result in tax ramifications as well. In 2009, Adidas India Marketing Pvt. (Adidas India) sustained significant damage as a result of a warehouse fire in India. Adidas India is the Indian subsidiary of Adidas AG, a German corporation. Following the loss, Adidas AG and Adidas India received property insurance claim payments of approximately USD20m and USD10.4m respectively. Whilst the entire facts are not known, it appears that Adidas India’s payment was pursuant to a local policy, whereas Adidas AG’s payment was pursuant to a global policy (presumably issued outside of India by an insurer not licensed in India).

India’s tax authority conducted an investigation. Adidas India’s position was that since the premium for Adidas AG’s global policy was paid by Adidas AG, the USD20 million received by Adidas AG was not taxable in India. India’s tax authority disagreed and its investigation uncovered email exchanges between executives of Adidas India and Adidas AG, indicating that the proceeds received by Adidas AG in Germany were for the benefit of Adidas India. As a result, the tax authority recommended that Adidas India be taxed on the USD20m received by Adidas AG. The tax authority found that the entire scheme was arranged by the Adidas group in such a way as to evade taxation in India.

Notably, Adidas India did have a local policy in place, and yet this fact did not save it from consequences resulting from the policy issued outside of India to its parent company. The Indian tax authority made its determination and assessed tax on the entity over which it had jurisdiction – Adidas India – notwithstanding that Adidas India appears never to have received the proceeds upon which the tax was based.

Financial interest clauses

Some companies build a “financial interest clause” into their CMP, usually through wording in the global policy. Here’s how it works: in lieu of wording that covers a company’s worldwide subsidiaries, the policy incorporates wording to cover only the parent company’s financial interest in these subsidiaries. The key feature of these clauses is that the parent company is the legal entity entitled to indemnity in respect of its financial interest in the loss(es) of its overseas subsidiaries.

However, financial interest clauses may not alleviate the claim servicing and claim payment concerns described above. A regulator may still prohibit the global policy carrier from performing local claim servicing activity since it lacks a local licence. Additionally, a tax authority may likewise view claim payments made by the global carrier as taxable, similar to the Adidas case.

Evaluating the risks

The fundamental question facing every company is whether or not to utilise a local insurance policy in a given country for a particular line of business. The more significant the risks, the greater the need for local insurance protection. A company working with its insurance partners should undertake a comprehensive risk assessment annually to determine whether a local policy is prudent in a given country for a given line of business. A thorough evaluation should encompass the company’s products and services, physical presence, corporate structure/capital position, lines of insurance and contractual counterparties. Ultimately, the risk manager must consider the local assets, exposures and individuals at risk.