Multinational insurance programs are exposing Canadian companies to regulatory risk on three fronts: misallocated premiums, unpaid local taxes and failure to comply with compulsory natural catastrophe schemes.
The common thread is the same in each case. Insurers and risk managers try to keep control at head office, while regulators are looking for proof that local exposures are properly rated and properly taxed.
"You can't just go into your local insurance partner's office in Canada and get one policy that covers the whole world," said Phil McDowell (pictured), global sales and distribution lead for international programmes and captives at HDI Global.
In most countries, admitted paper is a necessity and in some cases mandatory for core lines such as property and liability. Global programs exist to knit those local policies together, not to replace them. When risk managers treat the master as the real policy and starve local contracts of premium, they are inviting a tax problem.
"One way of approaching the pricing of a program is that you focus all of your premium in your home office and then you allocate the minimum possible premiums in each given territory," McDowell said.
That might look efficient from Toronto. For regulators elsewhere, it looks like under-declaration.
"If you're issuing a policy for a minimum premium, but the limits are high, for example, and the turnover is high, if it's a liability policy, then you're not allocating the appropriate premium to that territory," he said.
Premium levels and tax bills move together. If the declared premium in a country is implausibly low relative to insured limits and local revenues, the tax paid will also be too low. Local supervisors will not start with the master program structure in the home office – they will start with the local carrier they regulate.
"When you're not paying your accurate taxes, that's when you can fall foul of regulators who will conduct audits on the insurance partners that they're working with," McDowell said. "If your partner is being audited and they're not being compliant, your relationship is in trouble."
For a Canadian corporate relying on a local fronting partner, that is not a minor operational problem. Losing a local relationship can mean gaps in admitted coverage at exactly the wrong moment.
Natural catastrophe pools are the next pressure point. These schemes, usually government-backed, are moving from the margins to the core of property insurance in several markets. Spain's long-standing pool is the template. Italy introduced its own mandatory nat cat mechanism last year. McDowell points to Portugal and Germany as markets actively reviewing similar arrangements.
"As we see many more instances of extreme weather, whether it's wildfires or floods or hurricanes, you're seeing a lot of markets' development of these compulsory natural catastrophe pools," he said.
For years, many multinationals in Europe relied on freedom-of-services policies to write cross-border property risks from a single hub. That approach is running into the hard edge of compulsory pool rules.
"Historically, for example, in Europe you might have had a freedom of services policy which allows you to cover risks in more than one member state of the European Economic Area," McDowell said. "But once you've got compulsory pools, you think, okay, can you access that from the other country? Have you got the infrastructure to make that happen?"
If the answer is no, the supposed global solution may leave local operations outside the pool – with unclear recourse in a major event.
Some multinationals try to square the circle with master policy tools like differences in conditions, differences in limits and financial interest clauses. These devices are valuable, but McDowell warns they can become a crutch.
"If you're relying too much on things like difference in conditions, difference in limits or financial interest clauses, you're relying on a bit more non-admitted coverage," he said. "You're potentially exposing yourself to covering something in a way that's not compliant or it's not going to be paying tax in the appropriate way. And that can again fall foul of regulators."
These provisions are designed to top up or backstop local policies – not to substitute for them. When used as a shortcut to avoid structuring proper local contracts, they convert a regulatory issue in one country into a group-wide exposure.
"The most important thing is to make sure you've got compliant local policy," McDowell said. "If you've got that, then you're in a safe place."
