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Pitfalls of not having a local policy when doing business globally

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What happens if you, the insurance buyer for a multinational company, buy a global insurance program for which your insurer issues a single policy in one jurisdiction to your parent company?

Surely you will get broad protection for your business operations across the globe from an international provider that you trust. But a closer look at the coverage and service needs of your foreign subsidiaries, as well as legal requirements of the countries in which you have operations, will show that such a program may not give you the peace of mind you want.

When insuring global operations, risks and pitfalls abound when you rely on international policies and do not have local coverage. Although these pitfalls and their consequences may vary somewhat from country to country, some of them are common.

A jurisdiction may not recognize a global policyPerhaps the greatest risk of relying solely on a global policy is that a country where a subsidiary is located may not recognize a “non-admitted” policy. In fact, many jurisdictions

require a local policy, violation of which is considered a legal offence. If a claim occurs in a country requiring an admitted policy and the company only has a global policy, the foreign operating entity may be barred from receiving recoveries from the non-admitted policy. Additionally, companies may face regulatory actions for failure to maintain compulsory admitted insurance or for buying insurance from a carrier not licensed in the country or both.

Tax issuesEven without insurance regulators in the picture, by having a claims payment remitted by a global insurer to the parent company — the named insured in the global policy — the insured foreign subsidiary may not be completely off the hook. The local tax authorities may view the remittance as a taxable transaction, such as an additional capital infusion into the subsidiary. It may also require certain regulatory approvals from other government agencies, such as a securities regulator.

Pitfalls of not having a local policy when doing business globally

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If a claim occurs in a country requiring an admitted policy and the company only has a global policy, the foreign operating entity may be barred from receiving recoveries from the non-admitted policy.

Global insurance programs also require complicated calculations to ensure that international insurance premium taxes are paid to the proper authorities. Prior to 2001, it was assumed that premium taxes on multi-jurisdictional policies were due only in the country where a policy was written. But since the highly influential Kvaerner case in which a Scandinavian company that bought a global policy in London was found to owe premium tax to Dutch authorities for its operations in the Netherlands1, it is accepted that premium tax may be due in every jurisdiction where a company has operations. Failure to properly calculate and pay premium taxes can result in significant fines and penalties.

No local claims representationIf a global policy is not admitted in a foreign subsidiary’s jurisdiction, that subsidiary may be faced with the problem of not having local qualified claims representation. A global insurer often cannot provide the local knowledge and personal touch that local carriers can provide.

With a local policy, the insurer’s claims representative can quickly conduct a direct evaluation and quantification of the loss. For a property loss, a local adjuster is able to make a determination promptly, and a payment can be made in a timely manner. For a casualty claim, a local claims department knows the legal system, has ready access to experienced lawyers in the region and is better equipped to negotiate settlements following local customs and practices.

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With a global non-admitted policy, direct interaction between the foreign subsidiary and the insurer’s claims department may not be possible, and the claims process may need to go through a few more steps. Typically, the claimant foreign subsidiary must contact the parent company’s office, which in turn needs to get in touch with the global insurer to alert the claims unit. The insurer then assigns a claim manager, who may need to travel to the event’s location or may need to arrange for local claims assistance. All this inevitably makes the claims processing longer, and may result in less satisfactory outcomes. Additionally, if the claim occurs in a jurisdiction requiring a local policy, the global insurer may be barred from conducting some claim management activities locally, leaving the local subsidiary with little assistance at a critical time.

Coverage may not be adequateThe lack of a local policy may also leave the insured foreign subsidiary without adequate or necessary coverage. Global insurance programs may not fully address the specific requirements of a company’s overseas operations. It may not, for instance, cover such perils as typhoons and tsunamis, to which businesses in Asian territories like Taiwan and Hong Kong are exposed to. In some cases, coverage may not be tailored to local legal systems and business practices, potentially resulting in coverage gaps.

Access to pools and other special local coversUnlike a local policy, a global policy usually will not provide access to special covers, many of which are sponsored by local governments, such as catastrophe pools.

Global policy may not provide key servicesA global insurer may not be able to easily provide certain policy-related services such as answering inquiries about local exposures and coverage issues or offering certain types of risk management and loss prevention advice. A local insurer is usually much better qualified to provide clarification and advice about local issues and circumstances, and to address uniquely local coverage matters.

No recourse to regulators when in conflictA foreign subsidiary may have no recourse to the local regulators if it runs into a conflict with the global insurer, such as when there is a dispute over the policy’s terms and conditions.

Policies in many countries carry a provision that any dispute stemming from the policy can be referred to the regulator. With non-admitted global insurance, however, the insured foreign subsidiary does not have this recourse and will have to find other means of settling the conflict. And neither can it seek the local regulators’ intervention if the global insurer runs into a serious

The lack of a local policy may also leave the insured foreign subsidiary without adequate or necessary coverage.

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financial problem and becomes insolvent, if such global insurer is not under their authority and jurisdiction. Additionally, the insured cannot seek protection or apply for compensation from a scheme or fund that is meant to protect policyholders in cases where their insurer becomes insolvent.

Multi-currency poses a problemWhile relatively minor, another drawback of a global insurance program is the potential currency variations across the jurisdictions in which the policy provides coverage.

With currencies open to fluctuations, the insured parent company needs to set with the global insurer a fixed conversion rate between the Canadian dollar and a local currency. This will ensure that the value of the coverage remains acceptable when a foreign unit

makes a claim. With local policies, premiums, policy limits and claims payments all are in local currency, reducing foreign exchange complexities.

A “seamless” solutionWhile a global non-admitted program has its pitfalls, it offers a broader cover for businesses, offering protection against perils that a local policy may not cover, such as political risk. It also ensures a substantial amount of coverage for a company and its subsidiaries.

To assure complete and uniform coverage wherever they do business abroad, many companies opt for a combination of a policy providing worldwide coverage outside their home country and local policies — what is known as a controlled master program. Under this approach, local

A foreign subsidiary may have no recourse to the local regulators if it runs into a conflict with the global insurer...

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admitted policies are supplemented by a global “difference in conditions” (DIC)/“difference in limits” (DIL) policy purchased by the corporate risk management department.

Under this arrangement, the global program provides a company and its subsidiaries broad coverage, and individual foreign operations are protected by local policies that mirror as much as possible the global program’s coverage while conforming to the local regulations. Where certain risks are not covered by the partner local insurer, the global program will insure them.

A controlled master program purchased from a large multinational insurer provides a number of administrative benefits in addition to the coverage benefits. The DIC/DIL policy and the local policies essentially can be purchased as a package, eliminating the need to buy coverage locally on a country-by-country basis. The multinational insurance company typically is responsible for staying abreast of local insurance requirements and for assuring that the program fulfills the requirements of each country in which coverage is provided. The insurer typically handles the premium allocation and payment. Additionally, while local claims adjusters may be employed, claims can be coordinated centrally.

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References

1 Kvaerner. Judgement of the Court 14 June 2001. Accessed 18 February 2015. http://curia.europa.eu/juris/showPdf.jsf;jsessionid=9ea7d0f130de82e800ef9e3842f3af66e288939f73e9.e34KaxiLc3eQc40LaxqMbN4OaNyTe0?text=&docid=46436&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=96626, accessed February 2015.

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