Path to enlightenment

The past two years have seen a heightened focus on the issues inherent in insurance regulation, insurance premium tax and other parafiscal taxes, which apply when constructing cross-border insurance solutions. This focus has not been limited to insurers alone, with larger numbers of risk managers, brokers, tax advisers, lawyers and captive insurance managers placing compliance higher on their list of priorities than ever before.

There are ways to successfully navigate the maze of issues, but a willingness to invest the necessary time and effort - from all parties involved in the transaction - is paramount.

While, as in any good maze, there may be a number of paths that could lead to the desired destination, some in particular are tried and tested and offer a workable solution. These range from gaining a full understanding of the insurance purchaser's risk profile to ensuring that tax obligations are recorded and satisfy the relevant audit requirements (see box).

So, what if the maze is not navigated quite as it should be? A summary of Judgment B-1296/2006 delivered by the Federal Administrative Court of Switzerland on 13 December 2007 provides a clear reason why there is no such thing as an easy option.

An insurance broker in Switzerland purchased statutory professional indemnity insurance from a foreign insurer that was not admitted in Switzerland. The Swiss Federal Office of Private Insurance did not accept the insurance contract and refused to admit the broker into the central federal register of insurance brokers.

The broker subsequently appealed to the Federal Administrative Court of Switzerland. That court concurred with the FOPI's decision based around its rules - that insurance brokers are required to obtain statutory PI insurance only from insurers that are admitted in Switzerland. The judgment went on to state that an insurance broker cannot satisfy a regulatory requirement by presenting an insurance contract that is prohibited by insurance regulatory laws. The court further refused to permit an exemption for the foreign insurer in this instance.

The FOPI consequently refused to grant the insurance broker admission in the central federal register, arguing that the prerequisites for admission were not satisfied.

Although this case concerns an insured party involved in the insurance industry, it is highly probable that this approach would be upheld by the Swiss Courts for any insured entity buying insurance that covers a risk located in Switzerland from a non-admitted insurer - regardless of their underlying business. A similar stance could also be adopted by regulators from other jurisdictions, which could have a real impact on the cross-border viability of both the insured entity and the insurance company from a regulatory and, almost as importantly, from a reputational perspective. Therefore, having a clear, high-level process that is meticulously followed is vital.

Even when non-admitted insurance is permitted in a country, what may be prohibited in many instances are some or all ancillary activities, such as premium invoicing, loss adjustment activities and sometimes even the claim payment itself. If these restrictions are not observed, the insurer and the customer can run into regulatory difficulties. A further consideration is that these restrictions may vary depending on the insured entity or insured interest that is located in any given country.

Therefore, there is a requirement to take a deep dive into the organisational and legal structure of the insured and also into the ancillary services they require in their insurance solution to ensure they can be provided in a legally compliant fashion.

This is much the same from an IPT and parafiscal charge perspective. While in the European Union the location of risk rules tend to prevail - outside its boundaries anything goes. Simply referring to a set of rates generally available to all in the marketplace may not be sufficient to justify why an incorrect tax or rate has been applied.

Despite the issues being numerous and complex, a growing awareness of them across the industry is leading to a drive towards the building of compliant, sustainable cross-border or global insurance solutions. However, the sophistication of solutions available varies greatly depending on the willingness and ability of the parties involved in the process to meet the issues head on. The ability of insurers to access the necessary information and data in order to build a compliant solution may seem attractive. Experience, however, suggests that for some, the complexity of each step of the process will be such that any common tool will prove too expensive and too difficult to develop, let alone maintain. Such organisations will be forced to transact insurance without fully understanding the legal and tax requirements, which may lead to undesired consequences.

The underlying advice is simply this: if you have any overseas exposure covered in your insurance programme, look to those within the industry with the global knowledge, insight and the bespoke information to help you construct a compliant regulatory and tax programme. Failure to do so could create a situation where you are faced with severe regulatory, tax and even criminal consequences.

The good news, however, is that there is light at the end of the tunnel - as awareness grows, compliant solutions are already becoming available in the marketplace.

- John Latter is head of MIP Zurich Global Corporate UK and Adrian Smith is associate partner and head of IPT at KPMG