Beyond ‘admitted’ and ‘non-admitted’: it’s time to focus on how risk is ‘exported’

It is an interesting paradox that the march of corporate globalisation has not yet been matched by any meaningful attempt to successfully harmonise insurance regulation at a global level – or even frequently at a regional level.

Understandably, given the fragmented array of local insurance laws multinational companies must negotiate, concerns about the regulatory and tax implications of multinational insurance appear to be on the rise among risk managers. At Ferma’s European Risk Management Benchmarking Survey 2012, 42% of risk managers identified compliance with multinational insurance as one of the issues likely to have the greatest effect on insurance terms and conditions over the next three years.

Eagerly seeking a greater measure of certainty for their client, today’s broker and insurer will typically scour their repositories of insurance regulatory information for licensing rules, placement rules, premium payment rules and tax rates.  As they do so, the first question they have traditionally asked is whether ‘non-admitted’ or ‘unlicensed’ insurance is allowed in any given country. However, this is a starting point at best. At worst, it may miss the key part of the analysis. 

It is often said that many jurisdictions prohibit non-admitted insurance. In fact, most countries allow non-admitted insurance. However, they do set out conditions regarding the process by which risk can be ‘exported’ to an unlicensed insurer. At the simplest level, many laws specify that a risk can be exported only if local capacity is not available. Various conditions – some more onerous than others – may then be applied as to which lines or classes of business can be exported, whether a local broker is required for placement or is expressly prohibited, whether the insured has to make certain representations about local capacity or local terms and conditions, and whether premium taxes are to be remitted.

Even though multinational programmes are frequently negotiated and placed centrally, a more appropriate analysis when designing one is to look at the export process. That’s because local regulations are focused on exporting insurance at least as much as who is permitted to transact insurance. The analysis should therefore consider whether the right protocols are followed to export local risk, and not just whether the carrier can lawfully insure such risk. A number of regional examples help to make this point.

In the US, almost all states expressly permit an unlicensed insurer to insure local risks provided that the unlicensed insurer does not transact insurance business in those states without authorisation. The local risk may be exported to the non-admitted market through a special broker — a surplus lines broker, or directly to an unlicensed insurer under either ‘independent procurement’ rules or where a ‘sophisticated’ insured is permitted to access the unlicensed insurer without a broker.

In Canada, the various provincial laws differ, but all permit an unlicensed insurer to insure local risks provided that: (a) local capacity is unavailable for certain lines of insurance; (b) the local market does not support the terms and conditions; or (c) the broker or the insured assumes liability for paying applicable premium taxes on the premium exported.

Brazil permits the export of local risks provided no local capacity is available. However, this must be evidenced by 10 declinations and the applicable premium tax must be withheld before the premium is exported.

India also expressly allows insurers outside India to insure local risks provided that insurance business is not transacted in India. Although subject to appeal, the Delhi High Court, in May 2012, concluded that: (a) unless an overseas insurer is transacting insurance business in India, it does not have to be registered with the IRDA; and (b) Indian insurance laws may not regulate an overseas insurer’s activities outside of India unless the insurer is transacting insurance business in India.

Finally, Chinese law permits the export of local risk when local capacity is not available. However, an insurer transacting insurance business within China without a license is subject to heavy fines and penalties. A claim paid by such an insurer in China is also potentially subject to confiscation, fines and penalties.

So, Indian multinationals may insure their global exposures in India; Chinese insurers may insure their cross-border liabilities in China; a corporation in Texas or Alberta may insure its New York or Ontario risks with a Texas or Alberta insurer. But all the insurance ‘transaction’ activities (solicitation, negotiation, issuing a policy, invoicing or collecting premium, and in some instances paying a claim) must be conducted in the jurisdiction where the insurer is licensed (or admitted) to transact the business of insurance.

What’s more, since this is the case, then it should logically follow that, under the local laws of the insurer’s jurisdiction, an insurer may also offer excess insurance or umbrella insurance to cover any gaps in local policies or offer higher limits in connection with risks located worldwide. The insurer simply has to make sure that, when a claim is paid, it performs consistent with the laws where such payment is made.

In fact, the ultimate objective of any multinational programme should be to ensure that a valid claim will be paid compliantly. In some countries – Singapore, Hong Kong, Thailand, Chile, Peru, the UK, and from July Colombia, are all excellent examples of countries that are least restrictive – an unlicensed insurer can directly pay a claim. In others, local regulations may impose adverse fiscal consequences on the local insured or broker if a claim is paid directly in the local jurisdiction by an unlicensed insurer. However, merely focusing on the question of ‘admitted v non admitted’ gives us incomplete answers. Parties involved in designing multinational insurance programmes will do better to start by first asking: “How may a local risk be exported?”  Answering this question highlights the efficacy of local policies. It also helps determine whether a non-admitted excess policy can pay a claim in a local jurisdiction without penalty to the local broker or local insured, without any additional fines or taxes levied on that payment, and without it being subject to confiscation. 

As multinational businesses expand, particularly into emerging markets, the demand for multinational programmes is increasing. The scope of risks considered for multinational programmes is also growing beyond traditional property and casualty lines. Business travel and personal accident, professional indemnity, directors’ and officers’ liability, and environmental risk are all increasingly likely to be the subject of a multinational programme.

Someday, improved clarity of local law and enhanced predictability of enforcement may be achieved. But until then, the value of local policies should not be underestimated. In the meantime, improving our understanding of who is regulated when local risks are exported to a non-admitted insurer is essential to ensure that cross-border insurance programmes meet designed expectations.