German risk managers, and many others across the world, are becoming increasingly frustrated about a lack of consistency in the application of financial interest cover (FINC) clauses by insurers that is leaving them unnecessarily exposed to complications with claims payments and double taxation on premiums at parent and local level, according to a leading insurance tax expert.
A FINC clause covers the parent company for a loss suffered by a subsidiary and seems an increasingly viable solution for multinationals when local insurance regulations forbid non-admitted insurance. They are used to insure the parent company’s balance sheet for losses originating in foreign countries on top of exhausted local policy limits and conditions.
FINCs are a provision within a global or master policy that can step in where difference in conditions (DIC) and difference in limits (DIL) solutions do not work.
The purpose of the FINC clause is to provide regulatory protection for German and other multinational groups.
However, the inconsistent manner in which the FINC clause is being applied by global insurers is leading to German multinationals potentially paying double premium taxes, once in Germany and then again in other foreign countries, Praveen Sharma, global leader of Marsh’s insurance regulatory and tax consulting practice, told Commercial Risk Europe.
Sharma has campaigned for many years to achieve greater consistency and transparency in global programmes to assure risk managers they are compliant and will not be exposed to unnecessary, unbudgeted tax burdens.
He was instrumental in the creation of a new model Financial Interest Endorsement by the International Underwriting Association (IUA) that was introduced in April, and was intended to clarify when and how FINC clauses need to be applied and in which territories.
One of the big problems with global programmes is the lack of agreement among insurers about which countries allow non-admitted insurance and which do not, the latter potentially requiring a FINC clause.
According to Sharma, this is a particularly big problem in Germany and other European countries where insurers have been providing cover for multinationals that operate in territories such as the US and Canada, but not applying the regulatory and tax laws on a consistent basis.
This has exposed many German companies to unnecessary delays, complications when allocating and recharging premiums, and tax liability in both the territory where the insured subsidiary is based and at parent level.
According to Sharma, the main problem is that insurers continue to disagree about which territories are non-admitted and which are admitted.
The introduction of the IUA FINC clause is a great opportunity for insurers to clear this up once and for all, to provide multinational companies with greater consistency and contract certainty.
Further work is needed within the market, ideally through the offices of the IUA and European risk management associations, to finally agree on the status of all territories and help deliver transparency, consistency and compliance for customers, argued Sharma.
“The time is ripe for the insurers to apply the FINC clause on a consistent basis. We need to be transparent on the implications of FINC and who has to pay what, where and why,” Sharma said.
“This is a hot topic in Germany because of recent tax law changes there, and Brexit. A lot of German companies are now finding that they are paying double premium tax because they are still using London market insurers to cover risks outside of the EU. This carries a 19% tax but additionally tax would have to be paid in the US, Canada or the UK for operations there,” he continued.
“There is no reason why we could not work through the IUA as a trade association and with Ferma to ensure that the interests of the customers are heard and accommodated. There is an opportunity here to see whether we can clearly identify the list of countries where the law specifically prohibits a buyer of insurance to procure insurance from foreign insurers – and thus should fall under the FINC clause. This would be a major step forward, especially if we focus on the main countries such as US, Canada, Chile, India, Thailand, Taiwan etc,” argued Sharma.
Sharma said German premium tax law has increased the importance of structuring global insurance programmes in an objective and analytical manner to ensure they are “fit for purpose” and align with the business models of German multinational groups.
Insurers and risk advisers must ensure that the FINC clause concept and its ramifications are better understood by all stakeholders, or it could lead to unbudgeted tax and corporate finance surprises for German multinational groups.
But Sharma said the recent adoption of the IUA FINC clause provides a great opportunity to clear up the confusion for the benefit of customers once and for all.