What To Do as Regulators Clamp Down on Global Insurance Programs
Multinational companies worldwide must ensure compliance with insurance and premium tax regulations as local governments and tax authorities increase their scrutiny. Since the financial crisis of 2008, they’ve stepped up efforts to enforce minimum standards and discipline for capital and solvency, underwriting, claims, and investment.
One example is the International Association of Insurance Supervisors’ (IAIS) “Multilateral Memorandum of Understanding on Cooperation and Information Exchange” (MMoU). Because the MMoU gives local supervisors greater control over the way a local affiliated entity can benefit from its parent company’s non-admitted insurance coverage, insureds must pay particular attention to how their programs are structured.
Local Awareness Lacking
Many multinational companies are unaware that their global insurance programs may be subject to local compliance requirements. They may face unexpected reputational, tax, and financial repercussions. Others may learn that they are not in compliance with local requirements only after tax authorities audit their global programs.
Under pressure to generate additional tax revenues, several tax authorities are likely to implement policies to collect more tax revenues, either by auditing global programs or by introducing new premium tax rules.
Authorities have also increased enforcement of transfer-pricing laws, which require that any premium payments between connected parties be fully justified on an “arm’s length” — or appropriate buyer and seller independence — basis. This is going to be a significant issue for multinational companies with either captive insurance/reinsurance subsidiaries participating on global programs.
Given the shifting regulatory and taxation environment, risk managers should consider the following steps:
- Adopt a “clean sheet” approach to each global insurance program renewal to assess your company’s insurance needs.
- Establish a standard process for structuring your global insurance program and ensure it evaluates your company’s overall exposure, risk tolerance, risk appetite, and limits of insurance policies.
- Thoroughly research and maintain a transparent dialogue with your broker and global insurers to understand the potential regulatory and tax implications of the various program-structure options.
- Conduct scenario testing of the various program structures to obtain a better understanding of potential issues.
- Involve your respective tax and finance departments well before the inception date of your global insurance program and the signing of the contract.
When designing a global insurance program, it is critical that risk managers and their brokers structure a program that not only responds to the needs and goals of the multinational company in a cost-efficient way, but also takes into consideration the local regulatory and tax implications of all countries involved.