Is Non-Admitted a Non-Starter?
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Is Non-Admitted a Non-Starter? Global Programs & Staying Legal in 21st Century 4/29/08 9:00 AM – 10:30 AM Evolution of Traditional International Programs • • • • Locally Admitted Non Admitted Difference in Conditions/Limits Controlled Master Program 2 International Markets Market Tier U.S. Headquarters Headquartered Outside U.S. Tier I AIG Worldsource FM Global* ACE Zurich Tier II Chubb CNA Allianz* XL Global Tier III Liberty Mutual Travelers * Property Only Plus AXA, Royal & Sun Alliance, HDI/Gerling 3 Why Is Carrier Ownership Important? Carrier Owned Countries Affiliated Countries Total Countries ACE 52 100 152 AIG 89 50 139 Allianz 52 100 152 AXA 30 50 80 Chubb 28 100 128 CNA 14 95 109 FM Global 25 90 115 Liberty 24 112 136 Travelers 3 90 93 XL 25 75 100 Zurich 38 126 164 4 Managing the Admitted vs. NonAdmitted Process • Compulsory coverages – What are they? • Non-admitted permitted? • Options to countries where non-admitted is prohibited? – FOS Policy – Direct Writing Captives 5 Recent Trends in International Programs • Passport • Advantage • MIP 6 Keeping Legal: Are Fines and Penalties and Imprisonment Real? Netherlands Finland Germany UK India South Africa Kazakstan Singapore Brunei Malaysia Canada Puerto Rico 7 New Ways of Structuring International Insurance Programs 8 Agenda 1. Traditional international insurance Program Business – How non-admitted can be a non-starter 2. Possible legal solution approaches 3. How Zurich is starting up its international insurance program business for the 21st century – a look into Zurich MIP 9 Model of traditional international insurance program Provision of insurance cover by one insurance carrier for a multitude of risks, legal entities, persons (e.g. D&O) located in a multitude of countries on a DIC/DIL, sometimes even ground up basis. By operation of including such risks as “co-insured” under the master policy and/or by providing for worldwide cover, the Master Policy Issuer either covers risks or becomes active as an insurer in the respective countries, where risks are located. Master Policy Issuer Provision of DIC, DIL, Excess etc. into foreign jurisdictions China Russia Malaysia Spain Japan Local Policies 10 Traditional International Program Business How non-admitted can be a non starter… Legal, regulatory, licensing and tax requirements sometimes are attaching to the location of insured risk, sometimes to the place of the insurer’s insurance activity Ideal legal solution would often be: Issuing of local policies in all jurisdictions, where risks are located Economic problems with such solution: Aggregation, (inadequate) local capacities, language, tax and many more… Æ These difficulties led to a practice, under which first named insureds are provided with master policies, and eventually with local policies; Æ This practice creates gaps in insurance coverage between local and master policies; Æ Risk managers, understandably, want to close gaps. As a consequence, global insurers are covering risks of the insured’s group “worldwide”, be it - from the first dollar, or Many foreign jurisdictions perceive this to be - on top of local policies the conduct of Insurance business, which may be - subject to local authorization (license), - subject to local taxation, - subject to other mandatory requirements 11 Examples of Countries Prohibiting Non-admitted Insurance Brazil: Art. 1 of Law Decree No. 73 of 1966 Art. 113 Law Decree No. 73 of 1966 Art. 19 of Complementary Law No. 126 of 16 Jan. 2007 Art. 20 of Complementary Law No. 126 of 16 Jan. 2007 China: Circular 2002 No.112 of the China Insurance Regulatory Commission Japan: Article 186 Paragraph 1 of the Insurance Business Law Russian Federation Art. 4 par. 5 of the Law in Organization of the Insurance Business in the Russian Federation Switzerland: Article 3 in connection with Article 2 of the Swiss Insurance Supervision Law (Versicherungsaufsichtsgesetz, VAG) of December 2004 India Foreign Exchange Management (Insurance) Regulation 2000 Malaysia: Section 9 of the Malaysian Insurance Act 1996 Section 40 of the Malaysian Insurance Act 1996 Mexico: Article 3 of the General Insurance law Turkey Art. 2 and 29 of the Insurance Auditing Law no. 7397 Thailand: The Non-Life Insurance Act B.E. 2535 (1992) Hong Kong: Section 6 of the Insurance Companies Ordinance Such rules normally apply to any conduct of insurance. Æ Before there is proof to the contrary, such rules also do apply to Difference in Condition (DIC), Difference in Limits (DIL); There is discord between modern global insurance structures provided (International Program Business (IPB), Excess Layers, DIC / DIL, Co-insurance etc.) and existing 12 mandatory legal, regulatory and tax requirements. 12 Traditional International Program Business So what will happen? Regulatory Questions Nullity of cover as a consequence – does anyone mind? “I thought I have worldwide cover…?” Refunding of paid claims and premium Penalties and fines? Audit Questions The Audit Committee, internal/external Audits and SOX Contractual and Coverage Questions Cross border recognition and enforceability of clauses in front of courts Loss of objections under contracts Can reinsurers decline non-admitted claims (ex gratia payments)? Corporate Question M&A or Portfolio transfers - E.g. UK FSMA 2000 - Part 7 transfer. Claim Payment Questions Where risk location is attachment point for regulation and tax, claims often can’t just be deviated into “admitted” jurisdiction Smooth claim payment as the “proof of the pudding” 13 Traditional International Program Business So what will happen? Tax Questions: • The Kvaerner Case (ECJ 191/99) confirmed by the DSG Case (UK Tax Tribunal) Æ in EU IPT to be paid at location of risk • German Tax Authorities sending letters to foreign insurers (see fig.1) • Is the right entity (of the insurer’s group, or of the insured’s group…) paying the tax? • Is the correct amount of premium allocated to the respective risk coverage … • Is there need to have a tax representative in any particular jurisdiction …? • Interrelation between local tax authority and local regulator - and what, if I am not licensed there, or: How are taxes paid, if there is a license infringement? fig.1 14 Solution Crafting – Common Legal Principles Apply Globally How non-admitted can work under circumstances… While each country has its own rules and regulations there is a set of common legal principles that are undisputed (see also Licensing standard of the IAIS,1998) Legal, regulatory and tax requirements • Regulatory laws in countries must be adhered to • Licenses must be held unless a legal exemption applies • Mandatory coverage in countries of risk must be granted All these principles apply for any layer of direct insurance. Steps to satisfy requirements • Risks must be – Identified and – Allocated to the country where the risk is situated • Risk adequate premium apportioned per country of risk/contract/line of business • Tax laws in any country checked and any insurer due taxes paid according to the relevant tax laws of the country 15 Global Corporate in SW-ZIC155-20060927-MOA-TMG Æ Europe Most of/ SignorettiS these principles have already been part of an underwriting standard in many places. / 27 06 2006 Zurich’s Solution Crafting Tool Modules of Zurich’s internet matrix 1. Legal - providing up-to-date regulatory requirements and licensing information - country-by-country - by Line of Business - by 5 common Business Scenarios 2. Tax and Administration – allocating and paying taxes. Admin and documentation 3. Tax Reporting Researched, maintained and updated constantly (Legal and tax experts) Accompanied by underwriting rules 16 Solution Crafting Process 1 2 Business Scenarios 3 Allocate risk exposure to country of risk 4 5 Country Mapping Solution Crafting Example of a solution Example of a solution Tax payments & records 2 2 USIR Financial Int erest Cover t o prot ect parent ‘s int erest in caseIntcover Financial erest Cover and/or limit s can be ‘s t o prot ectnot parent f ully int export erest inedcase cover and/or limit s can not be f ully export ed USIR Count ries CND that allow HK nonCount ries CND admitthat t ed allow AU HK nonAU admit t ed M aster LP LP SwitzerLP land M aster Switzerland LP LP LP EEA => FoS DIC / DIL EEA => FoS DIC / DIL LP F LP D LP F LP D Tax LP LP USA LP I LP I LP LP LP USA SK J SK LP LP LP C J C LP = Local policy © Zurich - LP = Local policy © Zurich - Structure: In which scenario is insurance coverage being granted – to which extent is the insurer active abroad? Underwriting: To what extent need foreign risks to be covered and in which countries? What with gaps in cover? MIA Analysis: By Lob and by business scenario: What is permitted and what is not? 19 19 Deal Structuring: Insurance program structuring with the available uwr and legal tools: master, local, FOS policy, FInC etc. Tax: Allocation of adequate premium to cover. Taxation of same by insuring entity in correct jurisdiction by using designated means for payment. 17 Solution Elements (I and II) Freedom of Services (FOS) & US Insurance Rules (USIR) FOS The freedom to provide insurance services across all countries of the European Economic Area (EEA) is based on the EU’s non-life insurance directives. USIR Regulatory: without state-specific license, insurers are often prohibited from conducting insurance business Æ basically: local policy requirement Insurer Requirements -Established in the EEA -Licensed in the LOB and notified across the EEA However, different exemptions exist (e.g. industrial insured exemptions, marine exemptions, direct placement laws, self procurement laws, etc.) Risk Requirements -Located in the EEA -Reasonable and fair premium allocation -Taxes collected and paid -Tax and/or claim representatives are required State Board of Ins. V. Todd Shipyards Corp., 370 U.S. 451 (1962) still upheld Local Requirements Mandatory covers, pools and other local provisions must be considered in the policy wording Tax: doing business in any US State can attract Insurance Premium Tax (IPT) on both the insurer, the insured or the broker Nonadmitted Insurance and reinsurance reform Act (H.B. 5637) of 2007 – where will it go? 18 Solution Elements (III) Financial Interest Cover Location of Insured Asset Concept of the Financial Interest Cover: Insurance for the assets of the parent Policyholder / Parent -Exclusive insured -Payment of premium and claims In countries not permitting any cross border solution: NO Insurance on top of local policies Country X Asset Value Investment Shareholding In so far as losses remain uncovered ( ) beyond any local policy limit or condition, there is a decrease in valueof the shareholding or investment It is accepted today that the parent company has an insurable interest in safeguarding its investments, participation and other financial stakes in its subs. Where such subs can suffer any decrease in value, such decrease is reflected on the parents balance and it presents an insurable financial interest, not to suffer such loss at its own level. Measurement of loss by means of valuation clause. Insurance is provided under “home” financial loss license and for Policyholder exclusively 19 Possible MIP Solution, or: Non-admitted can work, where permitted… and it’s a non starter, where it’s not permitted USIR (DIC/DIL on top of LP US) Countries that allow non-admitted Financial Interest Cover to protect parent‘s interest in case cover and/or limits can not be fully exported to prohibiting countries CND HK AU Master Policy in client’s home country LP LP EEA => FoS DIC / DIL LP LP F LP D LP I LP USA LP = Local policy LP LP LP SK J C 20 ROYAL DUTCH SHELL PLC Global Insurance Program 21 Shell’s Global Operation Shell is a global group of energy and petrochemical companies. We are active in more than 130 countries and territories and employ 108,000 people worldwide. 22 Shell procures Insurance Coverage for • Property (onshore & offshore) including control of well • Liabilities • Construction (onshore and offshore) • Marine coverages • Credit, Aircraft, etc. • Directors and Officers insurance Shell uses its Captives to write this business where possible 23 Governance & Sarbanes Oxley Compliance Increased emphasis on Compliance... ... Extensive Internal Audits/External Audits/Sarbanes Oxley Compliance Compliance is a must – in addition to audits, we do the following: - Approved fronter register – financial security is assessed annually prior to renewal - Legal and Tax review annually before renewal for change in legislation - Tax remittance handled locally or at Solen for direct policies - Market policies – Legal and tax review prior to committing Solen capacity (case by case) Staying legal is robust due diligence and continuous market research 24 What Does an Insured Want ? • Appropriate, legally binding coverage • Claims that are being paid locally • Compliance with local laws, taxes remitted correctly • No surprises Because Shell has an internal Risk & Insurance department that places the business with the captives or the market, the expectation is that coverage is appropriate, legally binding and claims will be settled. 25 Key features of Shell‘s Global Insurance Program • Significant local business retentions (up to USD 20M) • Standard property coverage (USD 250M) - policy issued locally evidencing this limit • Excess property coverage for large exposures (up to USD 1150M) – policy issued locally evidencing this limit • Standard liability coverage for each operating company – policy issued locally • Group captive (Solen) purchases reinsurance to protect its balance sheet 26 Global Insurance Program Instructions, Account management Instructions Solen Insurance AIG Europe London Premium Transfer to Solen $$$ Premium Advice AIG Network $$$ Policy Premium payment Premium payment Insured AIG Bermuda Documentation Issue/Invoicing Cash Flow 27 Annual legal, regulatory and insurance tax compliance review: Start review Direct issuance possible ? Yes Yes Change in tax rate? No No Update files, issue policy Issue policy Who will issue? •AIG Network •US Insurer (Noble) • Other. Yes Financial Security review passed? No Alternatives ? Input from Broker/Service provider No Yes Issue policy 28 Issue policy The Shell insured risks are currently split as follows: Channels of Policies issued 22% 25% Direct (30 Countries) AIG (106 Countries) Other Cedants (22 Countries) 5% Market placements 48% Separate program for D&O: Central policy covers 9 countries and locally admitted policies for 122 countries 29 April 2008 29 Global Program – Allocation of Premiums to Operating Units Don‘t forget the other taxes.... Income tax considerations • The allocation of premiums to the territories must not be performed by the parent arbitrarily. Otherwise, tax authorities may consider premiums not arm‘s-length, which means that the expense cannot be deducted for income tax purposes! • Obtaining quoted market rates for each risk will ensure that an appropriate, fair premium is charged locally. 30 Claude F. Gallello Managing Director Willis International TEL: 212-915-7745 EMAIL: claude.gallello@willis.com Martin Strnad Legal Counsel Europe Attorney-At-Law Zurich Insurance Company TEL: +41-44-625-2517 EMAIL: martin.strnad@zurich.com Andrea Koroluk Insurance Manager Solen Versicherungen AG (A Shell Group Company) TEL: +41-41-769-4156 EMAIL: andrea.koroluk@shell.com 31 Is Non-Admitted a Non-Starter? Global Programs & Staying Legal in 21st Century 4/29/08 9:00 AM – 10:30 AM 32
