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Each country has different rules for regulating and taxing insurance transactions. In the EU there is some harmonisation, but the detailed regulatory and tax requirements still vary between countries. In the US the rules can even differ between states and provinces. The consequences of failure to comply can be expensive for insurers, but recently insureds have sought to satisfy themselves that their insurers are fully compliant.
So how do insurers, brokers and their customers ensure that multinational and regional insurance arrangements are compliant in all relevant jurisdictions? The solution is not easy to achieve, but it is possible, as demonstrated by the Multinational Insurance Proposition developed by Zurich.
Requirements for compliance
To ensure that multinational coverage is effective, the insurer must:
•determine the country of risk and allocate risk premium accordingly;
•comply with regulatory laws in each country;
•comply with the premium tax and parafiscal charges requirements in each country.
For insurers providing cross-border insurance in more than one country, it is impossible to comply with the appropriate regulatory laws or allocate risk premium properly without an understanding of the location of risk. The importance of this in the case of multi-national policies was highlighted by the decision of the European Court of Justice (ECJ) in Kvaerner v Staatssecretaris van Financien (2001). The ECJ decided that a member state could levy insurance premium tax on premiums paid to insure a legal person against business risks in that member state even where the premiums were paid in another country by a separate legal person (such as a parent, subsidiary or associated company) to an insurer also established in the other country. The establishment of this 'location of risk' doctrine for foreign premium tax purposes raised the issue further of insurers' ability to write policies in foreign jurisdictions on an admitted or non-admitted basis.
Allocating the premium
The location of risk rules vary between countries and different rules apply to different types of insurance. There is no substitute for checking the local rules in each case and no assumptions should be made.
Where multinational policies deal with risks located in more than one country, an appropriate element of the risk premium must be allocated to each country of risk to calculate the insurance premium tax payable in each country. There is no fixed rule for determining the appropriate allocation, but it must be carried out in a way that is fair, can be justified by evidence and is capable of being audited by the authorities.
Compliance with regulatory regime
Having determined the location of risk, the insurer must ascertain the regulatory requirements of each country of risk: is the insurer allowed to carry on insurance business in the country of risk?; are there any conditions that must be satisfied?; is the insurer only allowed to write certain types of insurance cover?Having answered these questions, the insurer can structure a multinational policy to comply with the applicable regulatory requirements.
For example, the insurer may:
•write insurance on a non-admitted basis - ie issue policies in its home country covering risk in other countries - where this is permitted; or
•write insurance locally - ie through a branch that is authorised in the country of risk; or
•have a (related or third-party) insurer issue local fronting policies for the risk.
The crucial question will always concern what is permitted by the local regulatory regime. In some jurisdictions policies issued by unlicensed insurers will be void and may even lead to prosecution.
Compliance with tax requirements
Insurance premium tax regimes exist in almost 200 countries across the globe. Aside from insurance premium tax many countries impose other parafiscal charges that can be overlooked too easily. Rules on liability to tax differ between countries. Responsibility to account for and pay insurance premium tax to the tax authorities lies with different parties in different countries. Failure to comply with relevant rules can result in liability to pay large penalties and interest, in addition to any undeclared tax.
Multinational insurance policies written on a non-admitted basis raise compliance and corporate governance issues not only for the insurer, but also for the insured. In Kvaerner, for instance, the Dutch tax authorities demanded premium tax from the policyholder in the UK, even though it related to cover for its Dutch subsidiary, because the insurer did not have any establishment or tax representative in the Netherlands.
It is not surprising that multinationals in the UK with branches and subsidiaries in other countries are asking insurers to confirm that all insurance premium taxes have been charged and accounted for correctly.
Zurich's Multinational Insurance Proposition
One possible solution to the global compliance problem is Zurich's approach to multinational insurance coverage. Zurich has worked with Lovells to develop a globally integrated underwriting platform that incorporates all foreign premium tax and licensing obligations.
Zurich's Multinational Insurance Proposition is designed to manage within a single transaction the tax payment reporting and licensing obligations for customers and brokers of Zurich's multinational insurance policies. It includes a proprietary global information system that tracks applicable laws and foreign premium tax requirements for almost 200 countries using an information database populated with data compiled by Lovells covering 72 of those countries.
It is maintained and updated by a dedicated legal, tax and technical team. The system's crucial feature is a detailed overview of the kinds of cover (primary, excess etc) that any country's regulatory regime permits foreign carriers to underwrite. This allows underwriters to structure complex multinational insurance deals that are aligned with the regulatory regimes of all countries where risks are located.
Furthermore, the system produces customer reports detailing all foreign premium tax collected and paid to the authorities, as well as documenting compliance with regulatory requirements. Zurich believes that its Multinational Insurance Proposition represents the first broad-based systematic approach to these issues in the insurance industry.
•Greg Sinfield and John Young are partners at Lovells