In this second part of the series on designing a multinational insurance programme, Mr David Halperin of AIG discusses the issues involved when MNCs insure themselves under local policies in the jurisdictions they operate in, and when they choose not to do so.
When crafting a programme for multinational exposures, consider the following questions on compliance:
- Does local law require the local subsidiary to purchase and/or be covered by insurance from a locally licensed carrier?
- Does local law prohibit the local subsidiary from purchasing and/or being covered by insurance from a carrier not locally licensed?
- Will the parent company charge the local subsidiary for the allocated premium?
- Will the local subsidiary take a tax deduction for the allocated premium?
- Will the local subsidiary need to pay premium tax in-country?
A multinational’s regulatory and premium tax requirements
Principles of extraterritoriality and international law dictate that the laws of a particular jurisdiction generally apply to conduct within its borders or by its nationals.
Multinationals have offices, operations, subsidiaries, affiliates, assets and people around the world. Because foreign laws generally apply to parties operating in-country, a multinational’s presence in a foreign country may subject it to some or all of that country’s regulatory requirements.
Certain countries have laws and/or regulations that may, with varying degrees of clarity and specificity, indicate that in-country exposures be covered by a carrier that is licensed to conduct business in that country. These mandates may take the form of a prohibition, an affirmative requirement, or both. They may be specific to a particular type(s) of insurance, apply only to compulsory insurance, or apply to all insurance, compulsory or discretionary. Some of these mandates may expressly state the party(ies) to which they apply, ie, brokers, insureds or carriers resident in the country, whereas others may not. The specific requirements vary country to country.
If a given country clearly requires local operations to be covered by a local policy issued by a locally licensed carrier, then a multinational’s local subsidiary — because it is resident in that country and thus subject to local regulation — may be at risk of violating such mandate if it is covered by the parent’s global policy, transacted outside the country by its parent, and issued by a foreign carrier. The local subsidiary, as an in-country resident, may also be required to calculate and settle local premium taxes itself, and failure to do so could result in penalties and interest.
Claims
When crafting a programme for multinational exposures, consider:
- If a loss occurs locally, can the local subsidiary retain local counsel and other litigation experts to defend a lawsuit?
- Will the subsidiary be able to retain loss control experts, engineers, medical providers and other vendors to assist in the claim adjusting process?
- Will the subsidiary be able to retain investigators, search for beneficiaries, assist in gathering documentation, or arrange for housing or other accommodations in the wake of a loss?
- Will the subsidiary be able to arrange for immediate medical treatment and evacuation?
The need to respond locally
The laws of a country generally apply to companies operating within its borders. Global policies are generally transacted entirely within the home country of the carrier and the multinational. During the solicitation, negotiation and binding of the global policy, the carrier does not undertake activities outside the home country.
Moreover, the carrier underwriting the policy is generally not licensed or conducting its insurance business outside its home country, and is thus likely entirely outside the purview of foreign regulation.
Simply covering potential exposures, such as people or legal liability, in other countries without undertaking activities in those countries does not by itself subject a carrier to regulation in those countries.
While a carrier may be able to consummate a global policy solely from its home country, it may not be able to provide essential insurance-related services locally, because it is neither licensed nor conducting business outside of its home country. It may be prohibited by local law from providing claim services or making claim payments locally.
Even if it is not prohibited, a global carrier may refuse to undertake these activities in foreign countries so as to avoid creating a nexus that could subject it to legal or regulatory scrutiny in those countries.
Consider how this might play out:
A multinational’s Southeast Asian subsidiary owns a factory that manufactures widgets. A chemical explosion causes significant damage to the facility, destroying inventory. While it is too soon to quantify the extent of the loss, a bevy of loss control experts, engineers, and investigators will be needed to conduct forensic analyses and facilitate the release of insurance proceeds vital to the local operation’s financial survival.
The factory does not have a local property policy in place. Rather, coverage for the loss is being sought under a global property policy that was negotiated and purchased by the parent company in Mexico and issued by a carrier licensed and operating only in Mexico. Because the carrier’s license and operations are confined to Mexico, it may not be able to undertake any claims-related activities in Southeast Asia or retain a third-party to do so either. The subsidiary may be left to service the claim itself — locating and engaging all necessary engineers, adjusters and experts, in-country or elsewhere, to investigate, analyse and adjust the property damage and time element aspects of its loss.
Additionally, as a result of the explosion 25 individuals sustain bodily injuries, many of them severe. They are suinghe subsidiary, alleging negligence in maintaining the factory in a reasonably safe manner. Here again, the factory does not have a local policy in place to respond to these allegations. Instead, coverage will be sought under the parent company’s global liability policy, also negotiated and purchased in Mexico and issued by the same carrier.
Once again, the carrier may not be able to undertake any local claims-related activities or retain a third-party to do so. The subsidiary may need to retain local counsel to defend these claims. Moreover, because of the country’s underdeveloped legal system, the subsidiary is likely to have difficulty identifying and retaining appropriate counsel. Due to conflicts of interest and other legal considerations, multiple law firms may need to be retained.
In sum, due to limitations on the ability of a global carrier to respond locally, a multinational and its subsidiaries may be in the unenviable position of responding to claims on their own. The best way to ensure that a carrier will manage losses and claims locally is to have local policies issued by a global carrier’s local affiliates as part of a CMP.
Income Tax
When crafting a programme for multinational exposures, consider:
- Will the claim need to be paid in-country?
- If the global policy cannot respond by paying the claim locally and must instead pay the parent company, will the parent incur tax liability in its home country?
- Will the parent need to make a capital contribution to the local subsidiary; if so, will the local subsidiary incur tax liability?
- Can the local operation survive if the parent does not infuse capital to make it whole for a loss?
Tax liability and capital
Not only does the absence of a local policy potentially impact the ability of a multinational to obtain claim services in-country, but if a claim payment cannot be made locally there may be tax ramifications as well.
Proof of insurance
When crafting a programme for multinational exposures, consider:
- Are local operations required to obtain insurance from locally licensed carriers?
- Does a contractual counterparty, government entity or other party need to be shown evidence that coverage has been obtained locally?
- Will failure to provide evidence of locally obtained insurance breach contractual covenants or trigger any commercial, contractual or reputational consequences?
Local obligations
Depending on the nature of a multinational’s local operations, a local policy issued by a locally licensed carrier may be needed to fulfil contractual and/or other obligations.
Consider:
A large South American-based pharmaceutical company and its subsidiaries sponsor clinical trials around the world. Following one clinical trial sponsored by the parent company in Europe, 50 individuals sustain bodily injury and are on the verge of litigation. The local subsidiary, which sponsors most of the clinical trials in this same country, has a local insurance policy that expressly provides clinical trials coverage. The parent company (and sponsor of this trial) only has a global policy issued in South America.
The Ethics Committee responsible for approving the clinical trial requires that, as a condition precedent to approval, the trial sponsor be insured by a carrier licensed in the country where the trial is conducted.
The parent company did not obtain this requisite local policy, and now faces potential regulatory consequences in addition to the individual lawsuits. Additionally, there may be ramifications for conducting a clinical trial without proper approval. On top of the financial exposure, both the parent company and the local subsidiary may face reputational risk.
A final note
The debate and discussion over structuring multinational programmes will continue. What really matters, however, is what the various options mean to each particular stakeholder – and the implications they have for a particular multinational’s insurance programme. We believe that the best protection will always be the risk manager’s ability to make well-informed decisions in covering his or her company’s unique exposures, at home and in every jurisdiction in which it operates.
Mr David Halperin is Deputy General Counsel, Global Commercial Insurance, AIG.