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Financial interest cover (FINC) clause: Low adoption sows confusion

In the complex world of multinational insurance programs, clarity and consistency are paramount for risk and insurance managers navigating regulatory and tax landscapes across multiple jurisdictions.

In the complex world of multinational insurance programs, clarity and consistency are paramount for risk and insurance managers navigating regulatory and tax landscapes across multiple jurisdictions. Yet, despite efforts to streamline one critical aspect — the financial interest cover (FINC) clause — its adoption remains low, and inconsistent insurer practices continue to fuel confusion.

The model FINC clause, developed in 2022 by the International Underwriting Association (IUA), was designed to provide a clear, consistent framework for multinational insurance buyers. However, more than three years on, the insurance market’s embrace of this model clause has been unenthusiastic at best, with insurers favouring their own bespoke wordings.

This divergence has led to a patchwork of interpretations and applications that undermine the very certainty the IUA model FINC clause sought to establish.

The promise of a model clause

The IUA model FINC clause was introduced to address a pressing need: to harmonize how financial interest cover is applied across multinational insurance programs. Financial interest cover is crucial because it protects the multinational group against the risk of regulatory challenges. Without a consistent approach, multinational companies may face the prospect of regulatory challenge as well as the possibility of double taxation on insurance premiums and claims, eroding the financial efficiency of their insurance arrangements.

Inconsistent application

There was hope that the insurance market would rally around the IUA model FINC clause to bring uniformity for the benefit of all stakeholders.

However, the application of the FINC clause wording still varies significantly between insurers, even within different national offices of the same insurance group. For example, one insurer may insist that the US should be included under the FINC clause, while another excludes India. Insurers are also applying the FINC clause in ways that often contradict national insurance regulations or the spirit of those regulations.

Why hasn’t adoption progressed further?

Praveen said, “The question I am frequently asked is: which wording is better, and who is correct?” The objective of the IUA model FINC clause was to reduce, if not eliminate, the inconsistency of wordings.

Several factors contribute to the modest take-up of the IUA model FINC clause. Insurer preferences for their own wordings are driven by internal risk appetites, regulatory interpretations, and legacy practices. The lack of a regulatory mandate or industry-wide endorsement means there is little incentive for insurers to standardize.

Moreover, the evolving interpretation of the national insurance regulations over the past three years has added complexity. While the regulations themselves have not changed significantly, their application has shifted, leading to divergent insurer practices.

The impact on multinational insurance buyers

The inconsistent application of the FINC clause has led to a diverse approach to the same issues and regulations, creating confusion for multinational insurance risk managers — and greater contract uncertainty. Without a standardized approach, companies may risk unexpected regulatory challenges and possible unbudgeted tax liabilities. The administrative burden of managing differing insurer requirements across jurisdictions also increases operational complexity.

Moving towards a more consistent future

Shifting away from fragmented approaches and embracing greater consistency will bring much-needed clarity, help reduce unwarranted regulatory challenges, and reduce the possibility of double taxation. More importantly, it will improve the overall efficiency of multinational insurance programs. This evolution will enable risk and insurance managers to manage the intricacies of global insurance with enhanced confidence, transparency, and control.

For further details on the financial interest cover clause and other aspects of multinational programs, please contact your Marsh Risk advisor.

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