🕐09.03.10 - 10:03 Uhr
Press release from Alexander Forbes : investing abroad becoming more difficult
Press release from Alexander Forbes Risk Services
9 March 2010
Ignoring local insurance regulations could scupper global expansion
In spite of our rapidly globalising world it is becoming more, rather
than less, difficult for multinational organisations to manage
cross-border risks.
"Increasingly, insurance regulators and fiscal authorities around the
world are moving to prevent insurance premiums leaving their countries -
so that local insurance industries can benefit and grow from foreign
investment" says Michael Duncan, Executive Leader, Alexander Forbes
Global Practice, Sandton.
As such, relying exclusively on your global risk programme to cover all
your cross-border risks is no longer sufficient.
"While compliance with
local regulations may cost more, paying attention to local insurance
legislation will avoid the jail sentences, protracted legal battles,
lost licenses, revoked contracts and black-listings that increasingly
pepper tales of cross-border misadventure" warns Duncan.
In simple terms, there are two types of insurance policies; admitted and
non-admitted.
Admitted insurance policies are issued by an insurer licensed in the
country in which the risk is domiciled.
Advantages include compliance
with local insurance regulations and no problems with claims payments.
Disadvantages include the loss of global bulk-buying benefits, lower
limits and more restrictive terms, potentially dubious financial
security of local insurers, and currency depreciation risks.
Admitted
insurance is also usually more expensive.
Non-admitted insurance policies are issued by an insurer not licensed in
the country in which the risk is domiciled.
For example, a Chinese
insurer writing a South African risk.
Advantages include global
economies of scale, centralized control, broader and more consistent
cover and reduced frictional costs - such as local taxes and fronting
fees.
As such, non-admitted insurance is also usually cheaper.
The principal disadvantage of non-admitted cover, however, warns Duncan
is that "it is illegal in many countries and could subject the
organisation and its executives to fines and penalties." In addition
there are generally tax implications and claims settlement difficulties.
For example, local regulators may refuse to allow claims proceeds to
enter a country if underwritten, in contravention of local regulations,
by a non-admitted supplier.
Furthermore, "since most multinationals want to be viewed as good
corporate citizens in the countries in which they are represented, there
is a very real reputational risk in disregarding local regulations by
naively relying on your global programme" warns Duncan.
Though the best approach to this dilemma varies from country to country,
one solution is to "arrange primary material damage, business
interruption and liability covers locally - and then access global
covers, via reinsurance of a local insurer, to protect the multinational
in the event that the local policy fails to respond" advises Duncan.
"In some countries" adds Duncan, "the penalties for breaching the
insurance regulations are draconian; in Indonesia, for example, a breach
could result in the responsible person or persons facing a prison
sentence of up to 15 years - or a fine of up to US$200,000."
In circumstances where the risk cannot be insured in the local market
because of its nature or complexity it is sometimes possible to obtain
dispensation from the local insurance regulator to arrange insurance on
a non-admitted basis.
In practice, however, "regulators prefer the risk
to be placed with a locally registered insurer, even if the entire risk
is reinsured internationally.
Since the local insurer will charge a
fronting fee this approach allows some income to stay in the country -
while enabling the local market to develop an understanding of how such
risks are structured and rated" says Duncan.
While Duncan believes that placing risks "off-shore" is becoming more
complex it is not impossible if done under professional advice, with due
regard to local regulations in concert with a well structured global
programme.
"Companies which take short cuts by relying exclusively on their global
programmes providing non-admitted cover do so at their peril" concludes
Duncan.
ENDS
Prepared by: Stuart Meyer, FD Media & Investor Relations
011 214 2408 / 083 618 7260 /
On behalf of: Michael Duncan, Executive Leader, Alexander Forbes
Global Practice, Sandton
011 269 1667 / 083 626 3021 /
Stuart Meyer
Account Manager
Johannesburg
FD
1st Floor, Lumley House, Rosebank Office Park
Johannesburg, 2193
T +27 (0)11 214 2408
F +27 11 214 2405
M +27 (0)83 6187260
www.fd.com
A member of FTI Consulting, Inc.
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