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The Multinational Insights with AIG podcast brings together experts, both within and outside of AIG, to discuss the most pressing issues related to the complexities of multinational insurance placements around the world.
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[00:00:00] Phil Rhodes: Welcome to our second installment of Multinational Insights with AIG. I'm Phil Rhodes, the head of multinational intelligence and host of our session.
[00:00:43] Today I'm very pleased to have my friend and colleague, Dave Halperin, AIG Deputy General Counsel and head of legal for AIG Multinational as our guest. Dave has an extensive background within the multinational commercial insurance space, a deep understanding and command of the legal and other intricacies related to effective multinational insurance placements, and perhaps as importantly, a unique ability to make often quite complex issues, tangible and real to colleagues such as myself, and I know many others.
[00:01:12] We've already received several questions and topics of interest from our brokers and clients and have tried to incorporate the most frequent into our discussion, but we'll certainly take any additional questions at multinational dot insights@aig.com. Dave, welcome to our session.
[00:01:28] Dave Halperin: Thanks for having me, Phil. Glad to be here.
[00:01:30] Phil Rhodes: let's start off with compliance topic that I know we hear a lot about in connection with multinational insurance programs. Can you give us a feel for what that means and how folks should think about it?
[00:01:43] Dave Halperin: Sure Phil, clients with operations in multiple countries will find their subsidiaries subject to the laws of each of those countries. Some countries have laws prohibiting local buyers from purchasing, quote unquote, non-admitted insurance. Which is essentially insurance provided by an insurance company not licensed in that particular country.
[00:02:03] The specific requirements vary by country and can further vary by product or even by the party. The law is applied to. If a country requires local operations to be covered by a locally licensed insurance company, then a client's local subsidiary. 'cause it's resident in that country and thus subject to local regulation may be at risk of violating local law if it does not have a local policy issued by a locally licensed insurance company.
[00:02:28] That is why you hear so much about compliance and the need for local policies, namely policies issued in each country to each of the client's subsidiaries as a critical compliance technique. The need for insurance from a licensed insurance company is one of the reasons why multinational insurance not.
[00:02:45] Consist of a single global policy covering the client in all of its subsidiaries worldwide. Rather, the most effective and compliant programs consist of local policies in all or most countries where the client has operations along with a master global policy serving as a coordinating backstop.
[00:03:03] Phil Rhodes: Great. That makes a lot of sense. as with most every insurance contract, claims handling and payment are often viewed as among the most critical elements of a well-structured multinational insurance program. I. In your view, what is the best way to ensure this functions in the most efficient manner?
[00:03:19] Dave Halperin: Sure. When you boil claims down on multinational programs, essentially clients want their claims paid where the losses occur. That's paramount for clients. The best way to ensure local claim payment is to have a local policy in place for each subsidiary in each country. The desire for local claim payment is another reason.
[00:03:38] Multinational programs typically consists of a combination of local policies and a master policy rather than merely one single global policy. However, even with a well-structured program, there can be situations where local claim payment may not be feasible. Such as if there's no local policy or say the local policy doesn't cover the particular loss, or the local policy is already exhausted, that's where the global master comes in.
[00:04:03] But potentially with limitations. While an insurance company may be able to provide a global policy with a global coverage territory from its home country, it may not be able to provide essential insurance related services locally because it's not licensed in the country where the loss occurred. May be prohibited by local law from providing claim services or even making claim payments locally even.
[00:04:24] It is not prohibited. A global carrier may refuse to undertake these activities in foreign countries so as to avoid creating a nexus that could subject it to legal or regulatory scrutiny in those countries. There can be risks for the client too. There might be situations where a global carrier would be comfortable making a payment into a local country where it does not hold an insurance license, but.
[00:04:47] Upon a review of the non-admitted insurance restrictions, a local insured might not want to receive such a local, a lost payment from the non-admitted insurance company because of potential tax and regulatory consequences that the local subsidiary may face. Clients and brokers should be considering those aspects as well. In some due to limitations on the ability of a global carrier to respond locally, a multinational and a subsidiaries may be in the unenviable position of responding to claims on their own. The best way to ensure that a carrier will manage losses and claims locally is to have local policies issued by a global carrier's, local affiliates, and third party insurance partners in the carriers network.
[00:05:28] Phil Rhodes: Great. Thanks Dave. not surprisingly, several questions were received on two issues. I'm sure you and your team are frequently discussing the financial interest clause and D I C D I L. Let's take them one at a time. First, can you explain how the financial interest clause functions and its benefits as well as limitations.
[00:05:46] Dave Halperin: Sure. An F I C or quote unquote fink as it is sometimes called, There's a provision within a global policy that covers the parent's loss of financial interest when a loss is suffered by a worldwide subsidiary. So it's sort of an indirect loss for the parent, if you will. A loss suffered by a subsidiary causes a reduction in the value of the parent's financial interest in that subsidiary, which the parent is indemnified under the F I C in its home country.
[00:06:12] And F I C is typically included as an endorsement to a global policy in a typical global policy without a. The policy covers the parent insured and also covers its worldwide subsidiaries, either through expressly listing those subsidiaries or under some type of broad insured wording. However, when an F I C applies, there is only one insured entity, only one the parent insured the subsidiaries are not actually insured entities under the policy.
[00:06:41] This may seem constraining, but that is the entire point when you consider the purpose of an F I c. As mentioned previously, some countries prohibit non-admitted insurance, and global policies are usually non-admitted in the countries of the client's subsidiaries. So the client's subsidiary is covered under a global policy and the subsidiary is in a non-admitted prohibited country.
[00:07:03] The client's subsidiary has a regulatory risk by virtue of being covered by an insurance company not licensed in the subsidiary's country. By removing the subsidiary from the non-admitted policy, the client's regulatory risk is mitigated. So the point of an F I C is to mitigate regulatory risk to the client's subsidiary by removing the subsidiary from being an insured on the non-admitted global policy.
[00:07:27] However, the client still needs insurance protection for its subsidiary to effectuate that protection instead of having the subsidiary covered on the non-admitted policy. The client will be covered for its financial interest in that subsidiary. Now, keep in mind the F I C has only been tested in court in a very limited way.
[00:07:45] There is not a large body of case law or other judicial precedent floating around. Famously, there is the Adidas case in India, which upheld an F I C and lend some credence to the f I C concept. However, that case is limited to India, and the case also had some unique facts supporting a separateness between the European master policy and the local policy in India.
[00:08:06] As for limitations, there are a couple critical ones clients and brokers should consider first and most importantly for clients. If an F I C is triggered, the claim payment may only be made to the parent client in its home country. Why is that? It's because the parent client is the only insured entity on the F I C, so it stands to reason that making a claim payment to the subsidiary that sustained a loss in the subsidiary's country is not supportable.
[00:08:31] How could you justify paying a subsidiary when that subsidiary is not actually an insured entity? The claim proceeds would potentially be deemed a windfall for that subsidiary and perhaps subjected to tax and possibly other regulatory measures. The payment must be made to the parent insured.
[00:08:48] This can be a significant drawback for some clients. As mentioned previously, clients generally want local claim payment. Second, because the subsidiaries are not insured entities under the F I C, they cannot rely on the global policy to evidence coverage to their counterparties or to government authorities depending on the industry of the client particularly the subsidiaries in question.
[00:09:10] This could be limiting. Third, because of the exposure covered under an F I C is the parent insured's financial interest in its subsidiaries. The exposure belongs to the parent insured, not the subsidiary. This means that the entirety of the F I C related risk is quote unquote headquarter risk sitting with the parent insured in its home country, and the premium allocation for that risk must be to the parent insured's home country.
[00:09:36] In some clients and brokers should be discerning in their desired use of an F I C. It can be quite helpful to mitigate regulatory risk in countries prohibiting non-admitted insurance, especially if the subsidiary has a substantial operation there. But it comes with certain trade-offs when it comes to discussions around F I C clients and brokers need to be making informed decisions.
[00:09:56] Phil Rhodes: Right. Thanks Dave. I can see by the complexity and the detail that you provided why this is of such great interest to our brokers and clients. let's tackle the next one. Difference in conditions and difference in limits. they both. A meaningful role in the placement of multinational programs?
[00:10:12] what should our audience be thinking about when considering D I C and D I L provisions in their own programs?
[00:10:18] Dave Halperin: Sure Phil, difference in conditions often called d i c and difference in limits, often called d i l or together, sometimes referred to as D I C D I L or even dil, is a critical component of multinational programs. I. The typical program structure, which is often called a controlled master program, consists of a master policy issued in the client's home country in conjunction with a series of local policies issued to the client's subsidiaries in multiple countries. The local policies are tailored to the legal and regulatory requirements in the countries, often times on policy forms that have been filed and approved by the local regulators, as well as tailored to the necessary coverages, customs, and nuances that have grown up over time in each country. That said, the client's risk manager or insurance manager is often accountable for ensuring there is a baseline of coverage across the group.
[00:11:11] The network of differing local policies could leave gaps in coverage from the client's headquarter vantage point. That's where the master policy comes in. It provides a backstop of terms and conditions and limits to plug those gaps. The plugging of those gaps is what D I C D I L is all about. If a local policy's terms and conditions do not, for whatever reason, cover a local loss, then the subsidiary could potentially be covered under the master policy.
[00:11:37] That would be characterized as a D I C cover. If a local policy's limits have already been exhausted, then the subsidiary could potentially be covered under the master policy. That would be characterized as a D I L cover. Now, a few points in D I C D I L first. The reason subsidiaries are entitled to D I C or d i l cover is because they're typically insured entities under the master policy.
[00:11:59] If for whatever reason they aren't, then they would not be entitled to such cover. One reason for this would be F I C. As previously mentioned, F I C operates to remove local subsidiaries from being insured under the master, leaving only the parent insured. If an F I C is triggered, there will be no D I C D I L.
[00:12:17] The second thing to keep in mind with D I C D I L is the master doesn't necessarily need to include an express D I C D I L provision. It's more of a concept really than a wording. If a subsidiary is an insured under the master, there's a right to coverage under the master period that only if there's a D I C or d i l provision.
[00:12:37] So if the terms of a Subsidiary's local policy do not provide cover, The subsidiary can turn to the master policy regardless of whether the master has an expressed D I C D I L provision. Third, the coverage under the master is not automatic. The subsidiary's right to cover under the master will depend on the terms and conditions and limits of the master. Lastly, the global policy could also cover the subsidiary other than on A D I C D I L basis. If the subsidiary, for whatever reason, does not have a local policy in place but is an insured entity on the master, then it would be entitled to coverage subject to the master's terms, conditions, and limits. Of course, claim payment mechanisms, namely where to pay might also need to be considered by both the insurer and insured.
[00:13:23] Given some of the considerations mentioned earlier, those of us who work in the multinational insurance space understand that the best most certain path to protection is to have local policies in place. Sometimes there isn't one and the master can potentially step in.
[00:13:37] Phil Rhodes: Right. Great. Thank you Dave. We've done quite a bit of heavy lifting right off the bat on some topics I know are, of interest very much to our brokers and clients. But I'd like to take a step back and ask you a couple of broader questions that we often hear specifically from your point of view.
[00:13:54] Are there any fundamental key considerations related to coverage, proof of insurance? Compliance or claims that you feel should be part of all placement discussions.
[00:14:04] Dave Halperin: There are certain critical decisions that need to be made by clients and the insurance companies and brokers need to educate the clients so they can make informed decisions. The first critical decision is where to purchase local policies. A client may have subsidiaries in a hundred countries a.
[00:14:18] The more significant the risk, the greater the need for local protection. Sure, a subsidiary may have a mere two person sales office In a given country where they sell benign, unregulated products, that country may not have a particularly active insurance regulator. In that situation, perhaps a client may choose not to arrange for a local policy and instead rely on the master.
[00:14:40] However, that is often the exception if the client has a substantial operation, produces dangerous products. Owns real estate, operates in a regulated industry, let's say, needs to show evidence of insurance to counterparties or regulators, or has frequency or severity of claims activity, then a local policy is more of a necessity than a discretionary purchase.
[00:15:04] It could also be a compulsory cover, like third party motor, for example. So the decision to buy local will be made for the client in that case. That all relates to front end procurement of a policy. But there are also claim stage considerations to pay attention to. As we've discussed, clients generally want claims paid in the country where the loss was sustained and paid to the entity that sustained the loss.
[00:15:26] Neat, simple, straightforward. That's how clients like it. However, as discussed earlier, an F I C will preclude local claim payment, so the client must undertake a risk-based assessment. How strongly does it want claims paid locally in a given country? Versus what is its regulatory risk such that it may want to consider an F I C, and by doing so, necessarily forego local claim payment.
[00:15:50] These are the types of decisions that clients need to make. Tax is also a critical discussion point on multinational programs. First, there is premium tax. The premium on a multinational insurance program must be allocated across all policies within the program. The premium for each policy must be just and reasonable, basically as if the policy were standalone and not part of a program, and they must reflect the actual risk covered by each policy.
[00:16:16] Premium allocation, contrary to the belief of some is the responsibility of the insurance company. The insurance company, client and broker should work together. Sure, but ultimately it is the responsibility of the insurance company and should be settled on prior to binding the program. Having appropriate allocations is important to protect the client.
[00:16:37] The parties need to make sure to avoid situations where, say, 40% of the risk within the program sits in a single country, but say only 5% of the global premium on the program is allocated to that particular country. Second, there is income tax. Depending on the program structure is possible. The client could sustain income tax liability in certain situations.
[00:16:59] Say a subsidiary sustains a large loss but is not covered on a local policy, or there's no local policy in place. The claim payment under the global policy may need to be made to the parent insured in its home country as opposed country of the local subsidiary. Since the parent insured did not actually sustain the loss, the proceeds could be taxable as income to the parent company because it could be viewed as a windfall.
[00:17:23] Moreover, if the subsidiary is not sufficiently capitalized to absorb the loss on its own, thus necessitating funds to be contributed by the parent of the subsidiary, the funds could potentially be considered taxable income of the subsidiary as well. Local tax authority could also look to recover unpaid premium tax from a subsidiary that receives the proceeds of a claim payment from its foreign parent.
[00:17:47] Or seeks to penalize the local operation for not having local insurance in place. These are the types of considerations that insurance companies, brokers, and clients should be discussing as part of their program structure.
[00:17:59] Phil Rhodes: Great. Thanks Steve. For walking us through that. in addition to these fundamental considerations that you outlined, there seems to be a wide range of approaches to structuring multinational programs overall. What is your view on how insurance groups and brokers should be supporting their mutual clients?
[00:18:17] Dave Halperin: Phil, the world is evolving faster than ever right now. Carriers and brokers need to stay abreast of all developments, regulatory trends, emerging risks, and so on, so as to be able to partner with clients, develop new products and new risk mitigation techniques. Program structures need to adapt to all this change.
[00:18:37] Insurance groups need to have a substantial global and holistic infrastructure to support clients, both on the advisory side to educate and the servicing side to effectuate so many policies. So much cross-border money movement, and other logistics. How do the insurance groups and brokers help the clients amidst all that change?
[00:18:57] The key is early and substantive discussions among all three parties with deep dives into the industries and operations of the client. The regulatory landscape of the relevant countries and the risk tolerance of the client, both in terms of insurance risk and regulatory risk data, of course, is a critical piece to these discussions.
[00:19:17] In the end, the quality and timing of dialogue among the insurance groups, brokers, and clients will often determine the success of the program.
[00:19:24] Phil Rhodes: This has been great, Dave. Thank you for spending some time with us for the second multinational insights with AIG podcast. We appreciate your expertise and the detail that you have provided on some very important topics submitted and covered for our multinational clients and brokers.
[00:19:42] We hope that this has been insightful for our listeners and encourage you to submit any follow-up questions, comments, or suggestions for future sessions to multinational insights@aig.com. Please join us for our next podcast later this quarter, and thank you for listening.
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