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Heightened scrutiny by foreign regulators means that brokers must pay more attention than ever before to taxation and compliance issues when making international placements

Daryl Angier on September 24, 2010

In sectors of the economy ranging from resource extraction and energy to manufacturing, high-tech and financial services, more and more Canadian companies are looking beyond our borders and setting up operations in countries all over the world. An international operation can be as simple as putting a local sales or service representative on the ground or as complex as building and operating a full-scale manufacturing plant, mine or oil well. In all cases, international operations create new exposures that require insurance coverage to protect those risks as well as those back home.

In recent years, however, the business of placing insurance coverage in foreign jurisdictions has become more complex and more demanding as governments and regulators around the globe have started to pay more attention to how foreign insurers and brokers do business in the local market. Additionally, corporate accounting and governance scandals in the early 2000s have created a heightened awareness around compliance issues in North America and elsewhere. This awareness extends to how global insurance programs are structured and administered.

Offshore Opportunity
According to insurance brokers Canadian Insurance Top Broker magazine spoke to, the economic sector that continues to see some of the most activity in international insurance placements is manufacturing. As people in many hard-hit small towns in Southern Ontario will testify to, a number of manufacturers have moved their operations to places like Mexico, China, India and Southeast Asia in the last few years to take advantage of lower labour and production costs. “Manufacturers that we’re dealing with here are making sure they’re not leaving any options on the table,” says Brenda Rose of Firstbrook, Cassie and Anderson in Toronto.

Tod Sloan, managing director at Marsh, deals with a number of multinational accounts in the manufacturing field. He says that manufacturers are leaving Canada and the US for two reasons.

“One is low cost. The other is to effectively put yourself in a position to take advantage of that market as the middle class grows in [places like] China, Russia and India. You’re poised to be able to take advantage of manufacturing and selling in those countries as well.”

Similarly, Ron Fetherstonhaugh, senior vice president at Willis Canada, says that the technology companies he deals with are moving more and more of their processes to Asia.

“To remain competitive, tech companies are looking to contain costs and access greater capacity by outsourcing manufacturing, testing and packaging of their products to suppliers who maintain leading edge technology and significant processing capacity.” He points out that even in this scenario where the company does not own and operate the production plant, it is still incurring a broad range of international risks.

“They can be shipping some of their testing equipment over to a manufacturer, which creates a new property risk. They may have staff on site to oversee the process, which creates a new workers’ compensation and employer’s liability exposure. They’ve created a transit exposure when transporting supplies in and transporting product out to their customers. You also have to consider the business interruption and contingent business interruption exposures created by a potential hit to the Canadian parent’s profit if they are unable to produce product.”

International Models
Brokers looking to build a global insurance program for their Canadian clients need to be aware of how these programs have changed in the last few years. According to Marsh’s Tod Sloan, going back 10-15 years ago, the common practice with international insurance programs was to issue a local policy in the domestic market where the insured company had its head office that would also cover risks in other jurisdictions. This broad form named policy model was problematic for two reasons.

“In some cases, the way global business was placed was a) totally non-compliant with local legislation, and b) reflected the coverage that was available in the domestic market without necessarily looking at any differences or coverages that may be available on a local basis in the [foreign] country and may not be available in the domestic market.”

I believe that individual countries are now waking up to the realization that there’s a lot of tax revenue associated with insurance placements in their countries.

Depending on the jurisdiction, the compliance side of the equation encompasses clients, insurance companies and brokers. Many of the foreign jurisdictions that Canadian companies are expanding into such as China, Mexico, Brazil and Argentina have very strict laws limiting or prohibiting outright the placement of insurance with non-admitted carriers and/or with brokers that are not licensed locally. Depending on the country and the nature of the violation, penalties may range from exorbitant fines and taxes on premiums to criminal penalties. Even in Canada, unlicensed placements made in the province of Alberta can result in taxes on the premiums of up to 50%, says Sloan.

The common consensus in the industry now is that the old model of the broad form named policy may no longer be adequate in certain jurisdictions and that insurers and brokers must take more care to ensure their clients are compliant with local legislation. This usually means purchasing local coverage for international risks from admitted carriers in the local market through a locally licensed broker. According to brokers interviewed for this article, this shift in thinking and practice has come about not because of any widespread pattern of change to international insurance laws, but because in the last few years governments and regulators around the world have started to more actively and vigorously enforce the laws they already have.

Opinions vary about exactly why various governments have stepped up their enforcement activities. Tod Sloan’s theory is that part of the explanation lies in the increasing fiscal pressures in other jurisdictions.

“I believe that individual countries are now waking up to the realization that there’s a lot of tax revenue associated with insurance placements in their countries.”

In addition, the guiding principle of these insurance laws is, of course, protection of the insurance buyers in the local market. The laws are there to protect domestic companies from situations where a foreign or non-admitted insurer will not make good on claim payments, or goes bankrupt and can’t make good on them, Sloan notes. In the event that carriers are not well funded to pay losses, “the government probably has to step in. There’s not too many governments out there that have extra cash these days,” he observes wryly. “I think the economic crisis has escalated that focus a little bit more.”

Another broad factor that may be influencing the attitudes and behaviour of regulators is the culture of concern around corporate governance and compliance that arose out of the scandals at companies like Enron, Tyco and WorldCom earlier in the decade. While not directly related to them, the heightened scrutiny of international insurance placements more or less coincided with the aftermath of these scandals such as the passage of the Sarbanes-Oxley Act in the US.

This trend has played out in Canada as well. Jennifer Albi, international network country manager for Canada at Willis Canada in Toronto, says that approximately six years ago she started to notice the regulatory bodies in this country pay closer attention to whether policies for international companies doing business here were meeting all the requirements for exemption from the federal excise tax (FET) on premiums.

“In Canada, it isn’t sufficient for a policy to merely be issued by a licensed insurer,” she says. “The broker has to be involved as the initial and primary contact for the insured, and remain involved directly with the client during the entire placement in order for the federal excise tax not to apply to a policy placed through a licensed insurer.”

Global Today
Andy Sloan (no relation to Tod Sloan of Marsh), partner in charge of international at the Magnes Group in Oakville, Ontario, says that the general intent of his clients is to replicate the same attitude to risk management they have in the Canadian market in the given foreign jurisdiction.

Assurex requires as part of the contract everybody enters into that we all agree to operate in English as a base language.

“Certainly they want to be compliant with the local laws and requirements, and that’s a bare minimum.” In practice, however, that can be difficult to do.

Suresh Krishnan is general counsel for the ACE Group’s Multinational Client Group, where he has global legal oversight of the ACE Group’s multinational business, and is the author of the ACE white paper, “Beyond ‘Non-Admitted’: A Closer Look at Trends Affecting Today’s Multinational Insurance Programs.” In the paper, he recommends that especially in countries like China, India, Argentina and Mexico that have very restrictive laws around non-admitted carriers, clients need to purchase local policies from licensed carriers in the local market. ACE itself has offices in over 50 countries that can capitalize on the needs of North American clients seeking an insurer that is not only licensed locally, but that also has knowledge and expertise in the local customs and requirements.

“Over the last 18-24 months, we have put a significant amount of investment in this area because that’s what clients demand,” he says in an interview.

To deal with these insurers, brokers must also rely on partnerships with other brokers situated and licensed in the local market. While large firms like Marsh, Willis and Aon which have offices around the world are already well positioned to coordinate global placements, independent brokers are increasingly getting in on the action by forming and/or joining global networks.

Magnes’s Andy Sloan says that before his firm joined the Assurex network two years ago, finding a suitable brokerage to handle a local placement for an international program was difficult and time-consuming.

“For the most part, we would be using underwriting contacts that we had, asking them for references to brokers that they thought to be suitable partners in those foreign jurisdictions. We would be developing a relationship from a standing start with those people. Hopefully we would be in an environment where we could use English as our communication format.”

Now that Magnes has the resources and rigour of the Assurex network behind it, the international aspect of the firm’s portfolio has grown significantly because of the enhanced communication capacities within the network.

“Assurex requires as part of the contract everybody enters into that we all agree to operate in English as a base language. The second thing is Assurex has a proprietary software platform that allows us to store documentation that can be edited or viewed, depending on access, and instantly allows common communication between all of the brokers involved on a specific account, as well as potentially underwriters, certainly the client or risk managers and so forth. The last thing they require is that there is an expectation of immediate response within the network.”

Whether it’s a multinational firm like Marsh or a network of independents, dealing with local brokerages on the ground is about more than just being compliant in that jurisdiction, says Marsh’s Tod Sloan.

“A lot of this has to do with making sure that you’re placing proper coverage on behalf of clients, and that you’re actually receiving the most competitive terms available in the local marketplace. Liaising with our local sister offices gives us the capabilities of making sure we have the most cost-effective and cost-competitive placement for our clients.