What do you need to know to keep a multinational insurance programme compliant?

Compliance in a multinational insurance programme comes down to a set of questions that have to be answered in every country where risk sits, before the programme is placed. They include: can insurance be bought from an insurance company that is not licensed there, which classes are compulsory, what must a local policy contain, and which taxes apply and who accounts for them. Almost every country in the world legislates to control the way insurance business is transacted, and the compliance requirements are different in each one. Getting them wrong is not an administrative problem. It can leave a policy void from inception, a subsidiary carrying an uninsured loss and the business facing fines and penalties that run to multiples of the premium.

Why multinational insurance compliance is decided country by country

There is no global insurance rulebook. Almost every country in the world legislates to control the way in which insurance business is transacted within its borders, and the specific laws in a country, the attitudes and economic conditions, as well as the political and natural environment, combine to make insurance purchase unique in each territory. Some markets apply more stringent regulations than others, and the insurance industry has no single standard to fall back on.

That is why a multinational programme cannot be assessed for compliance as a single object. It is compliant or non-compliant one jurisdiction at a time, and a position that holds in one market tells you very little about the market next door. The fundamental question in any territory is whether insurance can be bought freely both inside and outside the country, and the answer is rarely a straightforward yes or no.

For the risk manager, this means the programme design follows the answers rather than the other way round. In broad terms, cover in a given territory is placed in one of three ways: an ordinary local policy issued by a locally licensed insurer; a non-admitted policy written from outside the territory; or a fronting arrangement, where a locally licensed insurer the policy and the risk is passed on to the group's chosen carrier or captive. Each carries a different compliance profile in each territory, which is why the country position has to be established first.

The consequences for your business when a programme is not compliant

The risk is not abstract. A breach of local insurance law can render the insurance contract illegal or unenforceable, and an inadvertent breach is often only identified on disclosure of the contract to regulators, or during litigation, at which point it exposes the buyer to an unexpected uninsured loss.

The consequences fall into two groups, and they are wroth separating, because a breach in a single market can produce different outcomes for the client and for the insurance entities serving it. Enforcement varies by market, but the documented cases below show how far it can go.

Consequences for the insured

For the client, the exposure is to an uninsured loss and to the financial and tax consequences that follow it: fines and penalties, premiums that are not deductible, claims payments treated as taxable income, criminal sanctions, and difficulty competing or tendering for new business. Documented cases include:

• in Argentina, which prohibits non-admitted insurance, regulators fined the insured eight times the amount of the premium for placing business with an insurer not licensed to conduct insurance business in the country
• in Switzerland, a non-admitted professional indemnity policy bought from a foreign insurer was voided, leaving the insured without coverage
• in India, a tax authority required a subsidiary to pay tax on a $20 million claim payment made to tis German parent from the global master policy in respect of damage to a warehouse in India; and
• in Brazil, failure to comply with the requirement to collect premium locally and in Brazilian Reals may result in the policy being considered null and void.

Consequences for insurance companies, brokers and intermediaries

For the insurance entities, the exposure is regulatory and personal as well as financial: fines, criminal sanctions, removal from official registers, and accreditation or licensing difficulties that affect the ability to trade in that market at all. Documented cases include:

• in Argentina, the broker in the case above was fined 15 times the amount of the premium
• in Brazil, failure to comply with the requirement to collect premium locally and in Brazilian Reals may result in the insurer being fined an amount equivalent to the insured amount, and imprisonment of two to ten years for crime against the economy; and
• in Switzerland, the local broker in the case above was banned from the federal register and prohibited from practising in Switzerland.

The Indian case is worth dwelling on, because it shows that a compliance failure does not always surface at placement. It can surface years later, at the point of claim, when the programme is finally tested.

The regulatory compliance requirements to establish in every market

Achieving compliance means establishing, across every relevant territory, the source and scope of regulation, the compulsory insurances and the insurers permitted to write them, mandatory or restricted policy terms, the requirements attached to premium and payment, the calculation and payment of taxes, and the way the market operates in practice.

In practice, that resolves into a list of questions to be answered for each country in the operating footprint.

Is insurance required to be placed with a locally licensed insurer?

Some markets prohibit non-admitted insurance outright. Others permit it freely, and a third group permits it subject to conditions. The general position in the territory is the first thing to establish, and the exceptions to it are the second.

Are there any exceptions to the general non-admitted insurance rules?

Very few markets apply a single rule across the whole of their insurance business, so the general position rarely settles the question on its own. The exceptions to look for are:

• exemptions where a particular type of cover is not available locally, or where local capacity to underwrite the risk is limited, although permission from the regulator is normally required
• line of business level exceptions, where non-admitted cover is permitted for some classes and prohibited for others in the same territory; and
• compulsory classes, which in many markets can only be written by a locally licensed insurance company, whatever the position on non-admitted cover for other lines.

Which classes are compulsory, and on what terms?

Knowing which classes of insurance are compulsory in a territory is a starting point for the insurance buyer and the broker, together with the mandatory limits, retentions and terms and conditions attached to them. Classes that may be mandatory include motor third party, employers' liability, workers' compensation and professional indemnity. 

Who carries the burden of compliance between the companies involved?

Where the burden lies to ensure compliance with national requirements varies by country, and it can sit with the insured, the insurer or the broker. The answer determines who is exposed if something is missed, and it shapes how compliance responsibilities are allocated between the companies involved in the programme.

What must the local policy contain, and what form must it take?

The questions include whether there are mandatory policy forms or general terms and conditions; whether bespoke wordings have to be approved by and filed with the regulator before issue; whether there are rules on the language of the contract; whether the currency for premium and claims is prescribed; whether governing law and arbitration provisions are set by law; and what legally constitutes binding of cover in that territory. For example, insurance policies in Brazil can be issued only in Portuguese, and the regulator in China must approve manuscript wordings.

Is the use of a local intermediary mandatory?

Some territories prohibit the policyholder from contracting directly with an insurance company. In others there is no such prohibition, but placing through a locally licensed intermediary is established market practice, and departing from it can make a placement harder to execute even where it is lawful.

Are there other local insurance regulations that could void the contract?

A wider question, and one worth asking last in every market: whether there are any other aspects of local insurance regulations where failure to comply may render the contract void from inception or unenforceable.

The tax compliance requirements to establish in every market

Tax positions change frequently, and they change independently of the regulatory position. Where policies are written across more than one territory, insurance premium tax and other parafiscal levies may be due in each country. Within the EU, the Kvaerner ruling established that premium tax must be paid in the country where the risk is located, which is what makes premium allocation a tax question rather than an internal accounting exercise.

The questions to answer for each market are:

• what taxes, duties, levies or other parafiscal charges apply in the territory, including withholding tax
• who is responsible for accounting for them, whether that is the insured, the intermediary, a designated fiscal representative, the insurer or a combination. This is settled charge by charge, not just country by country: within a single territory, some levies may be payable by in the insured and others by the insurer
• whether there are exchange control restrictions that may preclude or delay payment of premium to an overseas insurer
• whether the currency in which premium must be paid is prescribed; and
• whether there is a premium reserve requirement, and if so, what percentage must be retained and when it can be released.

Tax authorities are actively testing these positions, with scrutiny of whether adequate premium has been allocated to local policies and to local risks insured under the master policy, and whether the appropriate taxes have been paid. Belgium, Canada and France are among the jurisdictions pursuing insurance premium tax audits.

The Indian example above shows the other side of the same exposure. Where a claim is paid centrally under a master policy in respect of a local loss, the local tax authority may take a view on that payment. In the Indian case, the authority asserted that the payment to the parent was designed to evade local taxes.

Where the rules run out

A clean checklist implies a clean answer for every country. That is not how this works in practice, and any honest account of multinational compliance has to say so.

Some countries set out their requirements plainly. Others do not. There are a myriad of specific insurance laws and regulations around the world, some of them straightforward and others distinctly opaque, and the result is uncertainty, unpredictability and ambiguity. Requirements that are a settled matter of fact in one territory are a matter of interpretation in the next, and the advice available in those markets is not always consistent. On tax, the liability rules differ between countries and can be contradictory or conflicting.

Sometimes the local rules simply do not address the point. Many countries define the conduct of insurance to include the payment of claims, for instance, while others are unclear on the issue or silent on it altogether.

Managing compliance risks where the position is unclear

Where that happens, the question stops being one of fact and becomes one of appetite. How much interpretive risk the business is prepared to take in that market is a judgement reached between the insured, the broker and the organisation's own legal function, and where the burden of compliance sits locally will shape who leads it. Two companies with identical information can reasonably land in different places.

What matters then is that the decision is recorded. Documentation setting out which risks are covered under the local policy and which are covered under the master policy demonstrates the approach that was taken, and evidence of the arm's length nature of the arrangement tends to be viewed favourably in a tax audit.

This is where high-quality country information earns its place. Good information does not remove judgement from the process, but it narrows the area in which judgement is required, and it means the judgement being exercised is an informed one.

Keeping compliance management current

Local regulations evolve continuously, so maintaining compliance is a fluid process rather than an annual one. The pace of regulatory change worldwide, and the corresponding increase in scrutiny, make multinational programmes harder to manage now than they were even a few years ago. Continuous compliance is the practical standard, and it makes compliance management one of the persistent challenges of running a programme across dozens of markets.

The timing problem this creates is easy to underestimate. Where a requirement changes between renewals, the programme is exposed from the day the change takes effect, not from the date of the next review. A position established at the last renewal and left untouched is not a current compliance position, it is a historical one, and the gap between the two grows every day it is left unexamined.

Timing matters at placement, too. Delays in policy issuance can cause an insured to fall out of compliance with local regulations and contractual requirements. They can halt major projects, such as engineering and construction work, and in the case of property policies they can put financing out of reach or render a policy non-compliant with the covenants in debt lending agreements.

What counts as compliance in the insurance industry, and what does not

Several things that matter enormously to a multinational programme are not compliance questions, and treating them as though they are muddies both.

The choice of local carrier, the reach and quality of an insurer's network, the speed of local claims settlement and the transparency of fronting costs all determine how well a programme works. The ability to respond locally on a claim, with local counsel, loss adjusters and investigators available in the market, is a design consideration in its own right. Claims processing performance belongs in the same bracket. Insurance companies compete on these capabilities and they are worth assessing closely, but they sit outside the compliance question. Those are questions about service, capability and cost.

Programme structure sits in the same category. Limit erosion is a good example: claims payments under any part of the global programme erode the limits of the master policy, so if limits are exhausted by a loss anywhere, cover can be exhausted across the entire programme, despite limits appearing to remain available under the local policies. That is a serious design issue, and it is not a regulatory one.

The distinction is worth holding because the two failure modes are different. A programme can be fully compliant in every territory and still serve the business badly. It can also be well designed, well serviced and unlawful in three markets. The first is a performance problem. The second is the one that voids policies.

Who has to get it right: governance and oversight

Compliance obligations and the evidential burden

Insurers, brokers and insured each carry their own legal compliance obligations, and in any given territory the burden may sit with any of them. What is specific to the insurance buyer is the evidential position: however well a programme is brokered and however capable the insured's network, it is the buyer who has to be able to demonstrate to the board, to auditors and, if it comes to it, to a regulator that the group is adequately and lawfully covered in every territory it touches. In practice that means securing a central mandate from management, auditing locally purchased policies to confirm they are sufficient to protect both the subsidiary and the group, and establishing governance arrangements that include a defined source of assurance on compliance.

Those governance arrangements are what turn a set of country answers into a compliance framework. In larger companies the work is shared between risk managers, in-house legal and compliance officers, and the governance question is the same in each case: can the business show, at any point, which compliance standards apply in each market and where the answer came from.

The broker's role and independent country information

The broker's role in this is substantial. A broker working on a multinational programme needs to understand the impact of changes in the insurance codes of the relevant countries, provide both factual information and professional judgement, draw on continuing feedback from the markets concerned, and alert the client to requirements in each territory along with valid alternatives and recommendations.

Independent verification is what completes the governance picture. Buyers will often seek assurance from their broker that compliance has been achieved, as well as independent advice from companies like Axco.

Frequently asked questions