Ignoring local insurance regulations could scupper global expansion
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In spite of our rapidly globalising world it is becoming more, rather than less, difficult for multinational organisations to manage cross-border risks.
“Increasingly, insurance regulators and fiscal authorities around the world are moving to prevent insurance premiums leaving their countries – so that local insurance industries can benefit and grow from foreign investment” says Michael Duncan, Executive Leader, Alexander Forbes’ Global Practice, Sandton.
As such, relying exclusively on your global risk programme to cover all your cross-border risks is no longer sufficient. ”While compliance with local regulations may cost more, paying attention to local insurance legislation will avoid the jail sentences, protracted legal battles, lost licenses, revoked contracts and black-listings that increasingly pepper tales of cross-border misadventure” warns Duncan.
In simple terms, there are two types of insurance policies; admitted and non-admitted.
Admitted insurance policies are issued by an insurer licensed in the country in which the risk is domiciled. Advantages include compliance with local insurance regulations and no problems with claims payments. Disadvantages include the loss of global bulk-buying benefits, lower limits and more restrictive terms, potentially dubious financial security of local insurers, and currency depreciation risks. Admitted insurance is also usually more expensive.
Non-admitted insurance policies are issued by an insurer not licensed in the country in which the risk is domiciled. For example, a Chinese insurer writing a South African risk. Advantages include global economies of scale, centralized control, broader and more consistent cover and reduced frictional costs - such as local taxes and fronting fees. As such, non-admitted insurance is also usually cheaper.
The principal disadvantage of non-admitted cover, however, warns Duncan is that “it is illegal in many countries and could subject the organisation and its executives to fines and penalties.” In addition there are generally tax implications and claims settlement difficulties. For example, local regulators may refuse to allow claims proceeds to enter a country if underwritten, in contravention of local regulations, by a non-admitted supplier.
Furthermore, “since most multinationals want to be viewed as good corporate citizens in the countries in which they are represented, there is a very real reputational risk in disregarding local regulations by naively relying on your global programme” warns Duncan.
Though the best approach to this dilemma varies from country to country, one solution is to “arrange primary material damage, business interruption and liability covers locally - and then access global covers, via reinsurance of a local insurer, to protect the multinational in the event that the local policy fails to respond” advises Duncan.
“In some countries” adds Duncan, “the penalties for breaching the insurance regulations are draconian; in Indonesia, for example, a breach could result in the responsible person or persons facing a prison sentence of up to 15 years - or a fine of up to US$200,000.”
In circumstances where the risk cannot be insured in the local market because of its nature or complexity it is sometimes possible to obtain dispensation from the local insurance regulator to arrange insurance on a non-admitted basis. In practice, however, “regulators prefer the risk to be placed with a locally registered insurer, even if the entire risk is reinsured internationally. Since the local insurer will charge a fronting fee this approach allows some income to stay in the country - while enabling the local market to develop an understanding of how such risks are structured and rated” says Duncan.
While Duncan believes that placing risks “off-shore” is becoming more complex it is not impossible if done under professional advice, with due regard to local regulations in concert with a well structured global programme.
“Companies which take short cuts by relying exclusively on their global programmes providing non-admitted cover do so at their peril” concludes Duncan.
Source: FD Media & Investor Relations
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