1. Block 5 The use of insurance by MNCs

2. Introduction
Insurance for MNCs will involve cross-border financial transactions
These transactions will have legal, transfer pricing and tax implications
There is no ‘one size fits all’ approach – MNCs will need to tailor solutions depending on each country of operation
The need for an auditable trail of documentation has become paramount

3. Aon risk survey 2013
Global Risk Management Survey 2013: “For the first time, claims service & settlement is cited as the top criterion in an organization’s choice of insurers, replacing “financial stability,” which topped the list in the past three surveys. After all, the ultimate purpose of an insurance policy is the promise to pay for a covered loss. Relating to claims service and settlement is financial stability, which ranks second on the list, followed by value for money. This shows that concerns for pricing are still tempered by an interest in dealing with carriers who have the financial capacity to pay claims and meet minimum financial ratings demand within contracts and corporate policies”

4. Risk transfer by insurance: why would MNCs do this (1)?
Advantages:
May fit well with the MNC’s risk attitude and appetite
They have a legal, insurable interest in their subsidiaries and JVs
Spread of risk / reinsurance support
Introduces a degree of certainty over loss financing
Allows access to insurers’ expertise
There may be compulsory elements

5. Risk transfer by insurance: why would MNCs do this (2)?
Disadvantages
Price and availability may vary
Might it discourage other risk management ?
Insurers include profit margin and operating expenses in their charges
Cost of risk issues
May increase the financing cost for high frequency / low severity events
Wider insurance market issues
However, biggest potential hurdles are regulatory and tax-based

6. Risk transfer by insurance: why would MNCs do this (3)?
The use of conventional insurance as a risk financing method by large MNCs has almost, certainly reduced, over the past 20 years
However, it is still the predominant method and represents a global market measured in billions of Pounds
Very few MNCs will completely avoid using, at least, some forms of insurance

7. Basic insurance options for MNCs
Buy locally in every country in which they have a risk exposure (relatively uncommon)
Buy a global policy in their home country to cover all of the risks in all of the countries, with no local policies (much less common than it once was)
Utilise a combination of both (increasingly common)
Do not buy insurance at all (uncommon)

8. Key insurance considerations for MNCs (1)
What are the risks and where are they located?
Is the MNC aware of the insurance-related tax and regulatory issues in these countries?
What level of insurance cover is appropriate and where should that cover be purchased?
Where will the claims be paid and what will be the implications of this?
Is there a captive to consider?

9. Key insurance considerations for MNCs (2)
Are there any country-related factors which impact on policy wordings?
How are premiums to be allocated across subsidiaries and countries and what will be the charging mechanism?
What are the tax implications relating to premium allocation, claims payments, transfer pricing and Premium Tax?

10. Content of global insurance packages
What are the likely required covers for an MNC?
Property
May include ‘all risks’, fire, theft, marine, terrorism / war risk, fraud / dishonesty, goods in transit, business interruption, motor. Natural catastrophe cover may be desirable, but problematic
Liability (Casualty)
MNCs are increasingly vulnerable to these risks. Cover may include employees, public, products, motor, professional negligence, environmental
Others
May include accident / sickness, repatriation, kidnap / extortion, political risk, product contamination, legal costs + those specific to the particular country / region

11. The MNC ‘wish list’ Consistency Operational efficiency
Financial efficiency
Legally compliant

12. Obstacles to the wish list
Almost all countries have strict and varied rules on:
Licensing of insurers
The legal aspects of insurance policies and their wording
Taxation on both premiums and claims
Transfer pricing arrangements
The enforcement of regulation has become much more rigorous
These are often tackled by the use of a ‘global insurance programme’- organised mainly in the MNC’s home country

13. Buying in the host country - reasons to do so
It may be a legal requirement
It may be politically expedient
Does it represent a closer connection between the cost of risk, the cost of risk financing and local risk management requirements?
Tax and claims payment problems may be less likely to arise
MNCs will be able to rely on their brokers and insurers to make the purchases

14. Buying in the host country - reasons not to do so
The local market may be problematic for various reasons, e.g.:
Transitional economies may only recently have moved from the state ownership of insurance
In all types of developing economies, capacity may be limited, partially due to reinsurance difficulties
Solvency may be problematic, or lacking in transparency
Fragmented purchasing reduces economies of scale benefits
It does not square with an Enterprise Risk Management system

15. Global Insurance Programmes (GIP)
May be referred to in different ways, e.g. ‘Co-ordinated Global Insurance Programme’, or ‘Controlled Master Programme’
Why have a GIP?
Factors which influence GIP decisions
Co-ordination of GIPs

16. Why have a GIP?
MNCs often prefer international operations to have a GIP because it can optimise:
Consistency
Legality
Control – local managers may lack appropriate knowledge
Economies of scale and leverage
The full overview of losses

17. Influencing factors
What are the insurable risks and how do these differ from the domestic insurable risks?
What is the risk appetite of the MNC and is this consistent across all territories, subsidiaries, JVs etc.?
Areas of operation, e.g. insurance purchasing for an EU-based company operating only in EU countries is fairly straightforward. Buying outwith the EU is far more complex.
Is there a role for Export Credit Guarantee Insurance

18. Global insurance programmes (GIPs)
These need to be co-ordinated as regards
Authorisation
Compulsory insurances
Taxation
Local conditions
Content of global packages
Complete co-ordination of all of these factors is very difficult to achieve

19. Authorisation (1) Admitted (or licensed) insurance:
Insurance written by a company which is licensed and registered to carry out business in the country where the risk is located.
This might be an insurer in the MNC’s own domicile, or it might be an insurer based in the host country
Government attitudes to licencing of foreign insurers vary considerably
Includes ‘fronted’ policies

20. Authorisation (2) Advantages of admitted insurance Legal
Use of a host country insurer may maximise:
Good ‘corporate citizenship’
Access to local ‘pools’
Transaction in local language and currency
Tax deductibility of premiums and losses paid without a tax penalty

21. Authorisation (3) Possible disadvantages of admitted insurance
These relate mainly to using an admitted insurance based in the host, and not the home, country, e.g.
Possible tariffs
Language and policy conditions
Restricted coverage
Fronting has additional costs
Solvency and capacity issues
Lack of central control by MNC corporate risk management

22. Authorisation (4) Non-admitted insurance
A policy written in one country which covers exposures in other countries by an insurer who is not authorised by the government of the latter
Typically arranged in the MNC’s home country to cover risks in host countries. Generally, no local policy will be issued
Can be permitted, i.e. not illegal, but not legally recognised, or non-permitted, i.e. illegal
Permitted has become increasingly uncommon

23. Authorisation (5) Advantages of non-admitted insurance:
Wider and more consistent cover
Easier management / control / claims
Known jurisdiction
No language / interpretation / currency problems
Theoretically, the avoidance of local premium and other taxes

24. Authorisation (6) Disadvantages of non-admitted insurance
Even permitted non-admitted will have numerous regulatory obstacles
Illegal polices can present major difficulties (mainly financial)
Tax implications
Claims settlements and recoveries can be highly problematic, e.g. few countries allow a non-admitted insurer to make a claims payment directly to a company in that country who has sustained a loss
Regulators in various countries are now much more inquisitive regarding the insurance arrangements of MNCs

25. An example of possible non-admitted difficulties (1)
A UK MNC has a crucial subsidiary manufacturing plant in India valued at £15 million
The Indian government do not allow non-admitted insurers to cover such risks, so our MNC buys from the local market
However, due to capacity issues, the maximum cover they can buy locally is £10 million
The factory is destroyed in a fire and the Indian insurer pays £10 million
How is the remainder financed?

26. An example of possible non-admitted difficulties (2)
The obvious answer is the parent company. However, by simply handing over £5 million, the Indian tax authorities are likely to ask many awkward questions
Could the parent company have bought insurance in the UK to cover such a short-fall? The answer to that is ‘yes’, but again there are major considerations regarding the tax implications of this.
Crucial to these implications will be the question of how the transfer pricing arrangements between the MNC and its Indian subsidiary were arranged and handled

27. Co-ordinated GIPs Three main types
Fully (or ‘Locally’) admitted programme
Full non-admitted programme
Combined programme
These will be influenced by the system of authorisation and enforcement of regulation
A fully admitted programme may heavily utilise ‘fronting’

28. How does fronting work? Many insurers refer to it as ‘partnering’
The MNCs insurer of choice is non-admitted in various countries, but the MNC wants to be compliant
The insurer issues a master policy, but as part of that enters into an agreement with local insurers to issue policies in the non-admitted countries
In developed insurance markets, these local policies may be acceptable. In less developed markets, they may not meet the MNC or the insurer’s standards. This is often tackled by a ‘combination policy’

29. Combination programmes (1)
A mixture of local admitted programmes and supporting non-admitted Difference in Conditions (DIC) and Difference in Limits (DIL) policy
DIC and DIL are often written on a contingency basis
May involve a large degree of fronting

30. Combination programmes (2)
Advantages
Legally compliant
Coverage is maximised
Fits well with corporate risk management
Disadvantages
Time consuming
Complex
Unforeseen difficulties in interactions between local and DIC/DIL regulations and policies , e.g. tax and transfer pricing

31. Compulsory insurances
Key risk assessment questions
What are the compulsory insurances and what are their compliance rules?
How fluid is the country’s approach to them, e.g. China’s recent moves to make environmental insurance compulsory?
Are there exemptions?
Must they be placed locally / with an authorised company?
Common compulsory insurances
Liability for personal injury, especially motor and employees
Fire insurance on certain classes of business
Third party liability for property damage / financial loss

32. Taxation A major, and increasing, problem
How are premium payments and claims payments between parent and subsidiaries affected by tax rules?
Discriminatory taxes
‘political weapon’ against foreign insurers
Usually either a premium tax or a profit tax
No tax relief against premiums paid
Increases cost of transacting business with a foreign insurer
Non-discriminatory taxes
Apply to all insurers
Most commonly a fixed rate premium tax

33. Consider
Think back to the quote from the Aon survey. Why might MNCs be very keen to use insurers in their home country and be very reluctant to use insurers in host countries?

34. Reasons for reluctance
Primarily financial:
Solvency
Capacity
Limited access to the reinsurance market
Also operational
Lack of experience and sophistication
Poor insurance market infrastructure
Restrictive terms and conditions

35. The influence of reinsurers
Reinsurers’ actions impact on all buyers of insurance
However, their actions are more keenly, and more immediately, felt by large-scale buyers such as MNCs.
The main impacts are likely to be:
Cost
Availability
Terms and conditions

36. Captive insurers
Not only MNCs use these, but the vast majority of captives will be owned by MNCs
Nature, formation and feasibility
What are they?
Why set up a Captive?
Issues of type and ownership
Advantages and disadvantages
How will they operate and how will they be managed?

37. Management of international claims (1)
International interpretation of contracts
E.g. implicit / explicit conditions
Do the UK / your domicile principles apply globally?
Litigation
E.g. time, cost, expertise, impartiality
Enforcement of judgements
E.g. existence of agreements, likely costs

38. Management of international claims (2)
Property claims may prove difficult, but international liability claims are likely to be even more problematic:
Laws
Legal systems and procedures
Levels of awards
Legal costs

39. A closing case study: Adidas in India (1)
See Wall Street Journal (
2009 – a fire at an Adidas warehouse in India
The parent company had purchased insurance globally from an insurer non-admitted to India
The parent company received $20million from the insurer and remitted $10 of that to the Indian subsidiary

40. A closing case study: Adidas in India (2)
Adidas India claimed that the payment was tax-exempt as the insurance was arranged and paid by the parent
The Indian tax authorities analysed s between parent and subsidiary and concluded that Adidas had arranged its insurance to evade Indian taxes
In 2011 they presented Adidas India with a tax bill based on the full $20 million payment, not on the $10 million that they received.
An example of the much more rigorous analysis of MNCs’ insurance arrangements which now exists!