Regulatory and Tax Implications of Global Programs
A risk manager has many facets to consider when tasked with the implementation of a global insurance program. Policy coordination, contract uncertainty, communication issues, accounting, regulatory and corporate and premium tax considerations are just some of the issues and hurdles faced by the risk manager.
At the 2016 RIMS Australasia Risk Forum held last month in Melbourne, a panel of industry leaders provided their views on the problems that can arise in global programs in the session Global Insurance Programs: The Problems that Lie Beneath. The session opened up conversations, drawing experiences from a number of experts including Praveen Sharma, Global Leader of Insurance, Regulatory & Tax Consulting Practice at Marsh, Tony McHarg, SVP and Head of Multinational Asia Pac at AIG, and Alistair Daly, Group Risk and Insurance Manager at Lendlease.
Sharma highlighted that risk managers of Australian multinational companies (“AMNC”) need to be fully cognizant of all potential issues that could impact a global insurance program, including regulatory and tax challenges.
The following are some of the key questions Sharma addressed during the RIMS forum.
Question: What is the role of a risk manager of an AMNC?
The role of the AMNC risk manager is to ensure that the group assets and people are protected. This primary objective should be non-negotiable. The risk manager must ensure the global insurance program provides comprehensive coverage at a reasonable cost and be as compliant as possible.
While it is possible to structure a policy that is 100% compliant, it may not be practical or cost effective. A fully complaint program will likely increase an organisation’s total cost of risk and potentially also increase gaps in coverage. For example, if only local policies are used, it will be 100% compliant but the local policy wordings may differ from one another, potentially creating gaps in cover.
Question: Why should AMNCs consider global insurance programs?
Before venturing into a global insurance program, AMNCs must first consider why they are buying an insurance policy at all, i.e. what is the AMNC trying to achieve; what is the value of an insurance policy to the AMNC; how does it affect its financial statements; and how do all these factors come into play on a global scale.
The insurance arrangement should be tailored and “fit for purpose,” so it is imperative that the AMNC’s internal risk management philosophy and business model/structure are fully understood by the AMNC’s risk advisor and insurance companies.
Question: What are the major considerations before embarking on a global insurance program?
Once the “why” has been established, other key considerations include:
- Quantum of the AMNC’s risk tolerance, risk appetite and risk transfer values.
- Potential Expected Maximum Loss (EML) or Potential Maximum Loss (PML) that the organisation and its major group companies could potentially suffer in their respective jurisdictions for all major classes of risks, such as property, liability or directors and officers liability.
- The location of the abovementioned risks. Generally, the AMNCs should consider where the group insured entities are domiciled under company law, or where the properties are physically located. The location of risks would then influence how they can be covered under the global insurance program.
- The insurance regulations of the countries in which these risks are located and their positions on non-admitted insurance. In certain countries the law specifically provides permission to cover risks on a non-admitted basis. In others, the law is silent on the issue i.e. “not prohibited”. These positions must be clearly identified ahead of implementing a global program.
- Any premium tax obligations on both admitted and non-admitted insurance structures for the AMNC.
Question: During the renewal strategy and program design phases, what are the key areas to consider that can help prevent any “unbudgeted surprises”?
In order to avoid “unbudgeted surprises” for the AMNC, the risk manager should seek to ensure the following information is made available to all parties during the strategy and design phases:
- Total cost of risk including all premium related taxes.
- Allocation of premiums across group companies and jurisdictions. The premium allocation methodology needs to be on a “just and reasonable” basis, as well as robust, defensible and equitable. The tax department of the organisation must ensure any internal recharge of premiums is consistent with the allocation methodology.
- Local policy limits should be equal to the higher of any contractual obligations to third parties, such as certificate of insurance and EML/PML. In this respect, merely a desktop benchmarking exercise may not be sufficient. We would recommend the AMNC to conduct a stochastic analysis with the assistance of its risk adviser. The advantage of this is that most of the insurance premiums and claims will be paid within the same country, mitigating any potential adverse corporate income tax implications for the AMNC.
- Other possible methods to reduce potential regulatory and tax implications for the AMNC. For example, the use of the Financial Interest Cover clause and Tax Warranty/Indemnity clause in policy wordings. The implications of these clauses need to be fully understood by the AMNC.
- The biggest “surprise” is arguably when cover is denied or the loss is paid to the parent company rather than to the loss making entity. Therefore, it is imperative that risk managers obtain written formal confirmation from insurers in relation to the performance of the master/excess/umbrella policies in the event of a loss. For example, who will the insurer pay the claim monies to, particularly if the loss-making insured entity is domiciled in a country where non-admitted insurance is allowed. The global insurer must provide its rationale for non-payment of claims to any insured entities before the policy is signed and sealed rather than after a loss. This is to eliminate potential misinterpretations and help close the gap in difference of expectations between the insurer and insured.
While a fully compliant global policy may not be pragmatic, the AMNC’s risk management team, tax and finance departments, knowledgeable risk advisors and global insurers can work together in a disciplined manner with a common goal to minimising the adverse implications of regulatory and tax issues for the AMNC.
The overall success of managing compliance issues, amongst others, in a global insurance program is largely dependent upon the collective effort by all parties to identify the group exposure and location of risk, determine regulatory and tax challenges, establish options to meet the needs of the organisation, and adopt a consistent and well informed strategy.