MANY GLOBAL CORPORATIONS WITH SUBSIDIARIES and branches in disparate corners of the world now structure and place their insurance programmes centrally. Their size and scope allow greater purchasing power, and this brings with it a more consistent group-wide approach to terms of cover. However, with these efficiencies comes added risk. The world is a patchwork of different legal and regulatory systems, with approximately 200 individual sovereign states, each with its own structures and requirements. The location of each insured company within a group, the location of tax filing and the location of each risk itself may have legal and regulatory implications.
DUTCH TAXATION
This became apparent in the EU in the now familiar case of Kvaerner Plc v Staatssecretaris van Financien [2001]. In this case, a Dutch company within the group of Kvaerner Plc, an English company, was insured for risks arising in Holland under a central policy taken out by Kvaerner in the London insurance market for its whole group. Under Dutch tax legislation, tax was due in relation to contracts of insurance covering risks in the Netherlands, and the Dutch authorities required the Dutch company to pay tax on the insurance of these risks.
Kvaerner objected, and the case went as far as the Dutch Supreme Court, which itself referred certain questions relating to the interpretation of the Second Non-Life Directive (88/357/EEC) (the Directive) to the European Court of Justice. The ECJ held in favour of the Dutch tax authorities, finding that the Directive provided that, if stipulated by the law of a member state, the legislation of the member state where risks are situated may be applied to the extent that that law requires. The case illustrates that despite a contract being placed centrally in London, variations in the tax regimes of different member states can cause unforeseen liabilities. This variation is perhaps more surprising in the EU, where the harmonisation of regulatory frameworks is at one of the most advanced stages of any region in the world.
US REGULATIONS
Another area of variance in the context of supposed harmony can be found in the US. Each of its 50 states (and one district) have their own rules relating to the sale, purchase and taxation of insurance. While the National Association of Insurance Commissioners ensures relative conformity between some states, there remain a significant number with their own diverse rules and requirements, particularly concerning surplus lines insurance offered by non-admitted insurers. There are certain constitutional rights allowing insurance buyers to procure insurance cover directly from insurers outside their state, which takes them outside the regulation of individual state law. However, there are specific requirements for such direct procurement and while certain states have enacted legislation governing this process, these laws appear mostly to impose tax on such transactions rather than simply regulating the process, and so add a further layer of complexity for insurance buyers.
INTERNATIONAL VARIATION
A key issue is the question of admitted and non-admitted insurers. As worldwide regulation becomes ever more stringent, national laws are more focused on ensuring that the assets owned by their citizens (or at least the assets within their borders) are protected by appropriately capitalised and run insurers. Certain states require that only insurers incorporated, operated and regulated within that state can underwrite insurance business. These include a number of South and Latin American countries such as Brazil and Mexico, Asian countries such as China and Japan, and Middle Eastern countries such as the United Arab Emirates. The position in certain other countries, for example Saudi Arabia, is left ambiguous by the relevant legislation. Nigerian legislation requires risks insured with non-admitted carriers to be individually sanctioned by the local regulator. Further complexity is then added by other countries where certain compulsory classes, including employers’ liability, workers’ compensation, third-party liability for motor insurance, and some professional indemnity insurance, must be underwritten by locally authorised insurers. This issue covers countries and territories that include Dubai, Thailand, Singapore and Hong Kong. Other countries, such as Turkey and India, strictly specify definitive classes of insurance that can be placed with non-admitted carriers, with all others required to be provided by admitted insurers. In Canada, a 10% excise tax is due if insurance is placed with non-admitted carriers.
OPTIONS
For a global solution to insurance cover, given the collage of law and regulation across the world, a full review of the legal and regulatory requirements of each of the companies and branches within an insured group is the safest way to minimise the risk of falling foul of an unfamiliar legal or regulatory pitfall in a particular jurisdiction. However, undertaking such a review even once, let alone on an ongoing basis, is an expensive and time-consuming business and may risk making centralised insurance purchasing uneconomical.
Accordingly, many prefer to adopt a more risk-based approach, focusing on key danger areas – for example, countries with particularly stringent legislation relating to the taxation of insurance premiums (and para-fiscal taxes attaching to such insurance) – and avoiding centrally insuring where local legislation requires compulsory insurances (such as employer’s liability and motor business) to be underwritten by a locally authorised insurer. Many insureds approach Lloyd’s of London, whose extensive global licensing position and know-how makes the franchise an attractive option for the placement of complex global risks. Indeed, in part due to its long history, Lloyd’s is specifically written into national legislation in a number of countries. A popular alternative to conventional insurance purchasing for global insureds is to establish a captive insurance company (see IHL161, p66). In effect, this will provide a self-insurance programme that can bring cost savings and stability in relation to premiums, and give greater control of the scope of insurance cover. However, it will also give rise to tax and regulatory implications that may be even more complex than for conventional insurance, and for which the captive insurer and its advisers will have primary responsibility.
COMMENT
When placing insurance programmes covering global corporations, early planning by insurance buyers, in conjunction with their brokers and legal advisers, should ensure the most appropriate solution for the entity in question. In most cases, the approach taken will depend on the insured’s appetite for risk, which will differ according to the nature of the organisation, its culture and objectives.
By James Phythian-Adams, solicitor in the commercial and regulatory group at Reynolds Porter Chamberlain LLP.