Non-admitted programs
A non-admitted policy is issued by an insurance company in a country in which it is not licensed and/or a country outside of the risk domicile. Advantages of this include absolute control over coverage terms and insurance buying decisions; lower costs; and accelerated program implementation.
The challenges associated with these programs are the inverse of those seen on the admitted side, namely: non-compliance with local laws and possibly country penalties (i.e., fines) as a result; no access to government pools; tax liability for non-compliance and for repatriating claims payments; no local premium allocations; no certificates of insurance; and the carriers position on non-admitted coverage in countries where it is not permissible varies.
Several countries now require a local fronting policy be issued where a non-admitted policy is prohibited.Brazilis an example.
The governing legislation relating to non-admitted insurance is article 6 of Decree Law 73/66, which states that a risk located inBrazilcan only be insured outside ofBrazilif coverage is not available in the country or if the coverage contravenes public interest. Even in these isolated cases, the IRB (IRB Brasil Resseguros, S.A.) has the right to make the necessary arrangements on behalf of the insurer. The authorization is made on a case by case basis, depending on interest and guarantees presented by the broker or the insurance company.
The penalty for any entity found placing non-admitted insurance, co-insurance or reinsurance inBrazilor abroad is equal to the sum insured or reinsured. (Art 113, Decree Law No. 73 of 21 November 1966). Other sanctions, ranging from simple warnings to suspension or cancellation of an operating license, may also apply.
Additionally, it is illegal to remit money abroad to pay the premium of non-admitted policies. Consequently, no money can be officially received inBrazilas indemnity of non-admitted policies. Thus, if a master policy is taken out overseas by the headquarters, with a coverage extension to all subsidiaries worldwide, like medical coverage for expatriate, the Brazilian legislation will not allow nationalization of foreign capital from insurance indemnities or medical expenses paid directly to the hospitals.
Benefits of Non-admitted programs
Market Practice
Given the strict control exercised over the market by the supervisory authority, SUSEP, and the potential penalties for non-compliance, insurers take care to ensure that coverage is placed in accordance with local regulations.
Given the size of the Brazilian market and the fact that some 80 reinsurers (including Lloyd's) are now legally authorized to operate, following the passing of Law 126/07 in January 2007, the need to resort to non-admitted markets is limited. One legal source consulted advised that just one case had been tested under the SUSEP procedure, which in fact related to an annuity product, whilst one leading broker could only recall an isolated credit insurance risk.
Potentially lower costs
This option should achieve a more favorable premium result, because a single insurer prices all coverage on a global basis. There is also the likelihood that coverage will be duplicated from one policy to the next, resulting in higher overall costs. Cheaper premiums are available through bulk buying and pooling of retentions. Insurers’ administrative savings in terms of time, cost, and economies of scale mean cheaper premiums.
Broader and uniform coverages from the corporate viewpoint non-admitted insurance provides a broader, standard level of coverage and addresses certain exposures, such as global interdependencies that may not be covered under locally admitted policies. The multinational may also obtain greater leverage in negotiating a broader policy wording than may be available under admitted insurance policies particularly as the risk is spread over many territories. Extended coverage or other extraneous perils may be added some of which may not be known or available in local markets. The policy can be issued with an “open limit” reducing the danger of the insured acquiring new values at a different locations and being without protection until confirmed, perhaps weeks later.
Management
Non-admitted insurance has the advantage of enabling risk managers to purchase insurance for all operating companies according to corporate standards. The level of cover required in each class and the conditions of cover can be mandated worldwide. With admitted insurance this uniformity of cover and limits is virtually impossible to obtain, as certain types of insurance are unavailable in some territories, or may be too expensive or too restrictive. A uniform level and scope of cover is especially important for multinationals where there is a high degree of inter-related exposures. Multinational cover through a non-admitted insurer can therefore provide cover for such risks in a way that would not be possible with local insurers. It is easier to ensure that there are no gaps in cover across the whole group with non-admitted insurance as well as no overlapping insurance. Communication between subsidiaries and the parent can be poor and lead to gaps in cover or inappropriate limits where the local unit is left to arrange its own cover. It makes sense to integrate policy wording to ensure appropriate coverage in the event of physical damage in one location that results in a business interruption elsewhere in the corporate family.
Common currency
Non admitted premiums will be payable in the home country currency as will losses. This use of a single currency eliminates the risk of exchange fluctuations. Claims can be paid to the parent company, which has control of the funds and can use them it is wishes. It is possible that the parent may not wish to rebuild a factory, for example, but may use the funds elsewhere in the group.
Choice of insurer
The choice of non-admitted insurer is clearly much greater than for a local admitted insurer as markets in the developed world are stronger and more diverse. It will also be easier to assess the financial security of a non-admitted insurer which is
usually domiciled in a highly regulated jurisdiction with sophisticated rating agencies.
Common language
A non-admitted policy can be written in the language of the parent company, and include common wordings and clauses to ensure that the cover is the same worldwide, as well as being easily understandable and leaving less room of errors and omissions.
Legal issues
Non admitted policies administered in the home country mean that any coverage disputes are subject to the home country’s legal system and courts which are familiar.
Claims handling
Claims can be handled by a single team who understand the intricacies of the policy wording and apply it uniformly across all jurisdictions. Claims can be paid to the parent company providing control over the funds and decisions as to where to deploy them.
Conclusion
While there are some efforts within governments to harmonize insurance laws, global harmonization of insurance and insurance-related tax laws is not a realistic short-term solution to the problems encountered today in insuring multinational enterprises. With sufficient knowledge to navigate the regulatory minefield of multinational insurance, the local broker with strong international experience can help to structure and implement a multinational policy program resulting in a more effective and legally sound program – one that is consistent with the participants’ needs and expectations respecting local compliance.
Sources:
Risk Management Magazine
Global Insurance Compliance – Helen Hayden
ACE – Beyond Non-Admitted
SPE – International Regulation Taxation