Top ten criteria for premium allocation to subsidiaries

In a global programme, the premium spend of the group will need to be allocated to the different subsidiaries according to various criteria. These should of course reflect the exposure but there are other considerations that come into play:

1. Size of exposure
The size of the exposure is often the determining factor but most companies exercise a large degree of discretion when it comes to apportioning premium.

2. Claims experience
The claims experience of the operation is a very important factor and is one of the most common criteria for the allocation of premium.

3. Quality of the risk
This is largely a reflection of the extent to which risk management and loss control measures have been adopted and implemented.

4. Level of local premium tax and other tax issues
The level of premium tax varies considerably throughout the world, and where the tax is especially high, there may be scope to reduce the premium allocation in order to save on premium tax. There are also other charges related to premium, such as fire brigade taxes, VAT and stamp duty. But be careful – tax authorities will be watching.

5. Previous premium rate paid by local operation
One of the aims of any multinational insurance programme is to reduce insurance costs. Where the local operation is required to change from using its local insurer to a non-admitted insurer, or a multinational insurer, the premium rate previously paid to its local insurer should be taken into account so that it can be improved upon. If it is not, then there is likely to be strong resistance to a centralised insurance programme from the local management.

6. Local tariffs
In a few countries, there may also be local tariffs that need to be taken into account when allocating premium.

7. Size of operation and ability to pay
Some consideration must be made of the subsidiary’s ability to pay, given its size and profit margin.

8. Rewarding/penalising operation for attitude towards loss control
Premium allocation is a vital tool for risk managers when it comes to implementing a group risk management programme. Lip service will be paid to such a programme but the difficulty is not only to ensure that local management adopt the loss control measures and other elements of the programme, but also that they filter down to the work floor.

The group risk manager will inevitably find that some local operations are resistant to adopting risk management techniques or do not consider them to be cost-effective or worthwhile. As a result, some sort of ‘persuasion’ will be required from the parent, and the central control of allocation of premium, together with the setting of retention levels, gives the group risk manager that leverage. At the same time, premium allocation can also be used the other way, to reward operations that have adopted the programme and implemented loss control measures. This will achieve the benefit of immediately gaining a premium reduction for loss control, something that is often lacking when it comes to commercial insurers. The reduction can be used to offset the cost of implementing the measures, whether it be sprinkler systems or improved security measures. This is one of the few ‘carrot or stick’ techniques that is open to the group risk manager in dealing with overseas subsidiaries.

9. Attitude of local revenue authorities – low premium
The extent to which this flexibility over premium allocation can actually be used is somewhat limited due the attitude of revenue authorities. In general, revenue authorities will be looking for appropriate rates to be set when it comes to multinational premium allocation. By this, it is generally understood to mean rates based on the level of rates in the local market.
Companies must be wary of being seen to charge too low a premium, as the local revenue authorities may feel that it does not reflect the true exposure. They may decide that the premium payment does not constitute insurance and therefore will not allow it to be tax-deductible. Where the rate is too low, the revenue authorities may perceive this as an attempt to avoid premium taxes.

10. Attitude of local revenue authorities – high premium
Companies must also be wary of being seen to charge too high a premium. Revenue authorities will be concerned about rates that are too high, as this may be interpreted as an attempt to gain the maximum amount of tax deductibility and not a reflection of the true exposure.