Global insurance compliance Featured

7:00pm EDT February 23, 2010

Changes in regulatory requirements, tax enforcement and claims activity around the world have heightened the interest in compliance with respect to global insurance placements.

This discussion is not just limited to the traditional international lines of insurance, such as property and liability, it also encompasses any cross-border placement, including directors and officers, errors and omissions, and even excess liability insurance.

“Increased compliance may lead to significant additional costs, but there are a number of options,” says Chris Gloriod, Global Client Network account executive at Aon Risk Services Central Inc.

Smart Business spoke with Gloriod about the increased focus on global insurance programs and how to make sure your business is in compliance.

What is driving the increased focused on compliance with respect to global insurance programs?

Corporate governance-related directives, such as Sarbanes-Oxley in the United States or the Turnbull Report in Europe, have created an increased awareness of compliance issues at senior management levels. Attention has turned to insurance where coverage arranged centrally for risks in multiple countries raises questions of compliance with regulations.

Recent changes in legislation, and case law in Europe and elsewhere, have expanded exposures to international firms and there has been a resulting increase in claims activity in areas such as D&O and E&O. Increased claims potential has raised concerns that global insurance programs may not work as intended, with potential problems in both the administration and settlement of claims.

Global insurers have also identified compliance as a key issue. Insurers are concerned with protecting the status of their operating license in developing territories but also with practical issues such as managing their ability to collect and pay appropriate premium taxes. Insurers are now more insistent on arranging local policies as part of any global program.

One key driving factor for these concerns is the legality of nonadmitted insurance. Each country has its own rules and regulations regarding the use of nonadmitted insurance, or insurance written with companies that are not licensed to write business within a particular jurisdiction. Roughly 85 percent of all countries have prohibitions on the use of nonadmitted insurance. Violations of nonadmitted insurance requirements can range from fines/penalties to prosecution and potential jail time. Historically, compliance with nonadmitted insurance requirements has been focused around traditional property & casualty lines of insurance, and these concepts are now being expanded to encompass other lines of insurance, as well.

Finally, overseas governments are placing a higher emphasis on the receipt of insurance premium tax (IPT). The European Courts of Justice ruling in 2001 on Kvaerner plc v. Staatssecrataris van Financien has had a significant impact on the application of IPTs under global insurance programs.

Kvaerner, a United Kingdom company, was a global engineering firm. It arranged for a global professional liability program with premium taxes paid in accordance with U.K. requirements. As the parent company, Kvaerner then internally allocated a portion of the total premiums to various subsidiaries, including its subsidiary in the Netherlands. The Dutch tax authorities assessed the Netherlands subsidiary for insurance premium tax on the proportion of the premium relating to the risk based in their jurisdiction. The European Court of Justice ruling upheld the tax authority’s right to assess Dutch taxes on the level of benefit provided under the global policy. Consequently, European Union states are becoming more vigilant in the assessment and collection of IPT.

Although the Kvaerner ruling specifically related to European Union taxes, other jurisdictions, such as Canada, Puerto Rico and several African territories, have taken an interest in premium tax collection under global programs. As countries become more aggressive in their search for revenue, it is reasonable to review any global program for compliance with the relevant insurance premium tax rules.

How can businesses address these compliance issues?

Solutions exist to address both regulatory and premium tax obligations created under global programs. Traditional methods of arranging for local policies to be issued, either as standalone placements in the local insurance market or as part of a coordinated program through a multinational insurer, in problematic jurisdictions are often the easiest approach. However, local market and/or global carrier limitations may not completely resolve all problems.

Alternative solutions include arranging for euro policies or petitioning local insurance regulators to approve the use of global programs where local market options are limited. Of course, each of these solutions can significantly increase the cost of any international program.

How seriously do businesses need to take the compliance of their global insurance programs?

Some may state that the issue of compliance is overblown. The lack of a significant level of case history does make reaching a clear consensus on the level of potential risk arising from noncompliance difficult. However, the situation is dynamic and no two companies will have the same view on compliance risk tolerance.

The level of regulatory and tax compliance in a global insurance program is an individual decision based around particular objectives and constraints for each firm, and there is no one-size-fits-all arrangement. There is no substitute for an in-depth discussion on the issues involved around compliance to help your company make informed decisions on the optimal program design. <<

Chris Gloriod is Global Client Network account executive at Aon Risk Services Central, Inc. Reach him at (314) 854-0775 or Chris_Gloriod@ars.aon.com.