Brokers operating in the international marketplace know that placing insurance policies for their clients’ global multinational risks is not easy. Brokers and insurers often run up against confusing and conflicting country insurance rules. What’s admitted,
what’s non-admitted and how to pay premium and other taxes are common questions that arise with each transaction.
If the placement is not done correctly, the broker and insurer may face fines and penalties, while the client may be exposed to double taxation, a void insurance policy and coverage gaps.
Brokers and insurers either obtain stand-alone policies locally for the parent company’s affiliates and subsidiaries, or they can use a master policy along with local policies. The master policy is intended to fill in coverage gaps resulting from limitations in local policies and to protect the parent’s interests in its local affiliates. It is an efficient method for creating a global insurance program, but it must be carefully crafted to meet the client’s needs and comply with multi-jurisdictional laws and regulations.
Ace and KPMG released a white paper titled “Structuring Multinational Insurance Programs: Addressing the Taxation and Transfer Pricing Challenge” (visit www.acegroup.com, click on “ACE Perspectives”), which outlines key issues when designing a master insurance program. The authors—Suresh Krishnan, general counsel for the Ace Group’s Multinational Client Group; Richard Sica, executive vice president for Ace Risk Management; Lucia Fedina, managing director for KPMG; and Aaron Maguire, partner with KPMG’s Insurance Tax practice—explore how to create a materially compliant master policy using the concept of “insurable interest.”
Some key issues they identify are:
What is an insurable interest? In the U.S., a parent company has an insurable interest in its affiliates’ risks to the extent the parent has a direct financial interest in preserving its affiliates’ property or would otherwise suffer a direct pecuniary loss.
English and European laws differ slightly. A parent company has an insurable interest in the financial condition of its affiliates. For example, a parent could buy financial loss insurance protecting its interest in the affiliate without running afoul of non-admitted regulations around the world.
Transfer pricing. One complication that arises in structuring a compliant master policy is inter-company allocations. How inter-company pricing among a parent and its affiliates is handled and documented can determine the correct recognition of local taxable income and deductions with respect to related-party transactions. Transfer pricing is an internationally accepted practice and is used to establish “an appropriate and reasonable transfer price” for inter-company transfers. Firms must document that the exchange is at arm’s length.
Arm’s-length principle. Under the Organization for Economic Co-operation and Development’s (OECD) “Transfer Pricing Guideline for Multinational Enterprises and Tax Administration,” “arm’s-length” generally means inter-company pricing and allocations must be consistent with the results that would otherwise exist between non-related entities transacted under similar circumstances. In many countries, local tax authorities are allowed to adjust income, deductions, credits or allowances and rely on this standard to ensure income is recorded correctly and appropriate taxes are paid. An insured using this method to structure a master policy must understand this concept to compliantly allocate premium and claims payments to affiliates.
Document, document, document. The importance of documenting these transactions can’t be emphasized enough. According to OECD guidelines, “It is a good practice for taxpayers to set up a process to establish, monitor, and review their transfer prices, taking into account the size of the transactions, their complexity, the level of risk involved, and whether they are performed in a stable or changing environment.”
Countries will weigh the reasonable documentation of price allocation against their “burden of proof” standard. These standards may include a global inter-company policy relating to the insurance arrangement; a signed agreement for each inter-company arrangement; and a report confirming that prices charged between affiliates are arm’s length.
Master policies are an efficient tool for managing the insured’s global risks. Using the financial interest concept can help ensure that the master policy is compliant and that applicable taxes and claims are paid.
Brokers can help their clients understand “financial interest” and the importance of transfer pricing and arms-length transactions.