Overseas insurers: the regulations they face and the implications for you.
But because the U.S. insurance industry is among the most heavily regulated industries in the world, overseas insurers are subject to the minefield of red tape that exists at the state level, which is rooted in its own insurance department, laws, regulations, policies and procedures to regulate the activities and financial health of insurance companies as well as agents, brokers and intermediaries. The manner in which foreign insurers are allowed to issue coverage on U.S. risks in compliance with relevant laws often remains a mystery to American risk managers--as do the related implications of placing their coverage overseas. Since most foreign insurers are not licensed in the United States and, as such, may only insure U.S. risks on a non-admitted basis, this market represents a key risk transfer tool that all risk managers should understand.
At a minimum, they should become familiar with the three main ways that non-admitted (or unlicensed) alien insurers may insure U.S. risks: (1) on a surplus lines basis, (2) through a direct placement or (3) pursuant to other exemptions to state insurer licensing laws.
State insurance laws contain an exception to insurance company licensing requirements by permitting a special class of unlicensed surplus lines insurance companies to insure certain distressed, unique or hard-to-place risks not generally available in the admitted market from licensed insurance companies.
State regulation of surplus lines business focuses in large part on specialty licensed surplus lines brokers who solicit, negotiate and place surplus lines policies. Generally speaking, surplus lines insurance companies (because they are not licensed) may not transact business directly in a state. Instead, all aspects of the transaction are handled by the licensed surplus lines broker.
Before placing a risk with a surplus lines insurer, a surplus lines broker must make a determination that the required coverage is unavailable in the admitted market. This requirement is typically satisfied by filing an affidavit with the state's department of insurance, confirming that at least three licensed companies declined the risk before such "surplus" business was "exported" to a surplus lines insurance company. Certain states maintain lists (known as "export lists") of coverage types determined by the insurance commissioner to be unavailable in the admitted market. A surplus lines broker is not required to go through the declination process for coverage types on the export list and may offer such risks directly for placement with a surplus lines insurer.
Surplus lines insurers are not required to comply with state requirements with respect to the filing and approval of policy forms and rates. This allows surplus lines insurers to tailor policies to meet the needs of the insured.
Not all types of insurance, however, may be written by surplus lines insurance companies. Some of the characteristics of risks written in the surplus lines market include: poor loss experience; not satisfying the underwriting criteria of licensed insurers; unique or hard to evaluate; or requiring high limits not available from licensed companies.
Coverage types that are often written on a surplus lines basis include, but are not limited to, directors and officers liability, errors and omissions, special events, products liability, pollution and asbestos abatement, and excess and umbrella.
An alien insurer wishing to accept surplus lines insurance typically starts the process with an application for inclusion on the Quarterly Listing of Alien Insurers published by the International Insurers Department of the National Association of Insurance Commissioners (NAIC). This includes the establishment of a trust fund of no less than $5.4 million for the benefit of its U.S. policyholders, which is revalued annually based on U.S. liabilities.
Once the company has been approved on the NAIC Quarterly List, it is automatically eligible in 11 states whose criteria for eligibility is based primarily on NAIC listing. In other words, there are no separate filings or financial requirements that an NAIC listed company has to satisfy in these particular states to write business on a surplus lines basis.
These states have made the determination that the NAIC standards are adequate and that companies meeting these requirements have demonstrated sufficient financial strength in order to write business. In addition, NAIC status assures automatic approval in four other states after the filing of relatively simple application forms.
Eleven other states permit alien, non-admitted insurers to write direct business based upon the licensed surplus lines broker's determination that such insurers are acceptable. These so-called "broker responsible" states do not have eligibility requirements per se, but place the burden on the licensed surplus lines broker to inquire into the insurer's financial stability and capacity.
The remaining states have individual eligibility and filing requirements apart from--or in addition to--those required for NAIC Listing. In several jurisdictions, there is an official list of insurers (the "white list") that are approved for use by surplus lines brokers.
This list is published periodically and circulated to brokers. In most jurisdictions, surplus lines insurers are also required to provide annual statements/reports and related financial information. Alien surplus lines insurers must maintain minimum capital and surplus of at least $15 million, although states often prefer higher amounts.
Alien surplus lines insurers are subject to less regulatory oversight than licensed insurers. In addition, alien surplus lines insurers are not required to participate in state guaranty funds in most states and, as such, policyholders do not receive guaranty fund protection in the event of insurer insolvency.
Independently Procured or "Direct Placement" Insurance
The second method of accessing the non-admitted market is known as either a direct placement or independently procured placement. This takes place when an insured elects to travel out of state to purchase the desired insurance from an unauthorized carrier either directly with the company or through a broker or agent not licensed by the jurisdiction in which the risk is located, such as a Lloyd's broker.
The right of a U.S. citizen to leave the state to obtain insurance on a risk located in the state with an unlicensed company without being regulated by the state was first enunciated by the Supreme Court in its landmark decision in State Board of Insurance v. Todd Shipyards Corporation.
While a number of subsequent decisions have distinguished Todd Shipyards, the current case law would still protect a direct placement transaction from state regulation provided the following circumstances apply:
* The insured does not access the non-admitted insurer through a resident agent or surplus lines broker.
* There is no activity by the nonadmitted insurer in the state either in the making or in the performance of the contract.
* The transaction takes place "solely" (or, in New York, "principally") outside of the state where the insured is located.
Currently, only 39 U.S. jurisdictions have enacted self-procurement/ direct placement statutes. Since these statutes govern actions by buyers that are "constitutionally guaranteed," however, they are intended more to tax rather than to regulate the transaction.
These statutes do not prescribe rules or procedures which would grant jurisdiction over a non-admitted carrier in a self-procurement transaction, but simply impose a tax on the insured for the privilege of procuring insurance on its own behalf. Thus, subject to the judicial limitations mentioned above, state statutory authority is not required for a citizen to leave the state and purchase insurance from a nonauthorized carrier.
Other Exemptions from Insurer Licensing Laws
Certain U.S. jurisdictions exempt non-admitted insurers from surplus lines regulation for insurance procured by industrial insureds. State statutes define industrial insureds in various ways, but, in most states, the exemption applies to "sophisticated commercial buyers" that maintain at least $25,000 in annual premium for non-mandatory coverages, employ full-time risk managers (or outside insurance consultants advising them of procuring insurance), and have a certain number of full-time employees (usually 25) or amount of gross sales.
Any company that qualifies under the industrial insured exemption can procure insurance from an unauthorized insurer without leaving the state or following surplus lines procedural requirements. Thus, declinations from the admitted market are not necessary. There is no escape from premium taxes, however, since most states still seek to tax that portion of the premium allocable to in-state risks. The burden of filing and paying the tax will typically fall on the insured, since a surplus lines licensee is not required in the transaction.
The surplus lines laws of 42 U.S. jurisdictions provide some type of ocean marine and transportation exemption from insurer licensing laws. Most of these states provide a complete exemption for "ocean marine" although these exemptions do not always extend to aviation or transport risks generally. Certain jurisdictions do not have a full statutory exemption or require such business to be written by an eligible surplus lines insurer. In these states, insureds must follow the individual criteria for writing surplus lines business as set forth in the state's surplus lines laws.
Significantly, insurers issuing coverage on a direct placement basis or pursuant to the exemptions for industrial insureds or covering ocean marine or transportation risks are not subject to oversight by U.S. insurance regulators. Moreover, insureds do not receive guaranty fund protection on policies issued by such unauthorized insurers.
Although the terms used to describe certain overseas insurers--"unauthorized," "non-admitted" and "alien"--might give the impression that these companies are engaged in illegal activities, most overseas insurers of U.S. risks are reputable, financially stable companies that are operating in compliance with U.S. laws and regulations.
Moreover, alien insurers play an important role in the U.S. markets, particularly for large, hard-to-place risks not generally available from most U.S. insurance companies. It is therefore important that buyers of insurance coverage be aware of the rules outlined above before purchasing coverage from an overseas insurer.
Admitted vs. Non-admitted
Subject to a few narrow exceptions, an insurance company may only issue a policy of insurance in a state where it is admitted to transact business as a licensed insurer. Licensed insurers in the United States are broadly regulated as to solvency, rates and forms, market conduct, permissible investments, leverage (whether as to capital structure, premium to surplus ratio, or limit of risk to surplus) and affiliate relationships. Licensed insurers are also required to participate in a variety of government mandated insurance programs and pay assessments levied by state guaranty funds in the event of insurer insolvencies.
An alien insurer may be licensed to write business in the United States on an admitted basis by establishing a U.S. branch. Fifteen states currently have port of entry laws which provide for the licensing of a U.S. branch of an alien insurer. In order to be licensed in its chosen port of entry, an alien insurer must satisfy requirements similar to a U.S. insurer, including minimum capital and surplus requirements.
To establish a U.S. branch, an alien insurer must also appoint a U.S. manager and establish a trust fund to satisfy projected U.S. liabilities. Once licensed, a U.S. branch of an alien insurer is regulated much like a U.S. domiciled insurer, and must submit to market conduct and financial examination and reporting requirements.
As licensed insurers, U.S. branches of alien insurers are required to participate in state guaranty funds, which provide their policyholders with protection in the event the insurer should become insolvent. Accordingly, a U.S. insured purchasing insurance coverage through a U.S. branch of an alien insurer can take comfort in the fact that the insurer is subject to extensive oversight by state regulators and the policy is backed by state guaranty funds.
RELATED ARTICLE: The foreign tax man cometh.
by Richard Asquith
Local Insurance Premium Tax (IPT) compliance on international risk cover has always seemed a distant concern. This is now changing and, increasingly, the foreign tax offices are actively pursuing insurers or approaching policyholders and risk managers directly for outstanding taxes. What do they want?
Scope of Insurance Premium Tax
IPT is a worldwide tax, in many forms, on insurance contracts. It is generally calculated as a percentage of the gross premium. In most countries, initially, it is the insurer or captive who is responsible for the calculation, collection and payment of any taxes.
In most countries, however, the policy-holder is next in line for the tax liability. Should the contract issuer fail to take care of the IPT, then the tax authorities are able to pursue the insured party.
In addition to IPT, there are also a number of other levies on insurance, payable to various local bodies. These parafiscal charges range from the standard fire brigade levy on property in most territories through to the funding of national priorities, such as contributions for earthquake losses in Iceland.
Many countries exclude life and marine cover from IPT, however, and reinsurance is largely exempt.
Where is the IPT Due?
For many years, the insurance premium tax liability was determined by the place where the contract was written. In Europe, the location of the risk was clarified in the second non-life directive.
This last point was underlined in a key European Court of Justice case from 2001. This case centered on the Norwegian engineering giant, Kvaerner, which had taken out insurance cover in London for its European subsidiaries. At the time of the policy being written, IPT was calculated on the basis of UK tax rules. The Dutch tax authorities brought this case, claiming that elements of the insurance risks covering Kvaerner's Dutch operations where instead liable to Dutch IPT. This view was upheld, and the policyholder was held liable for the Dutch IPT.
Following this case, there has been a scramble by international insurers and captives to be fully compliant with local tax regulations, especially in Europe.
European IPT Compliance
Unlike VAT, a sales tax based on European Union rules, there is no overriding tax-setting authority for European IPT. This means there are many variations in terms of rates, treatment of classes, payment methods, etc.
What has simplified the process for international insurers is the Freedom of Services regime. This enables insurers and captives to write business across European borders without having local branches. European insurers are required to seek "Passporting Rights" from their local regulator. In many countries, a local fiscal representative must be appointed that deals with the tax authorities on behalf of the insurer, including filings and settlement of any taxes.
Non-European insurers can often write business across the region on a non-admitted basis. The tax authorities, however, often then view the policyholder as liable in the first instance. This has important implications, as we will see below.
Beyond the United States & Europe
For global insurance programs outside of the United States and Europe, IPT compliance is tied up with local insurance regulation. For many global programs, if there is a local underlying policy, compliance with local tax is taken care of by the local agent/broker.
Many insurers, however, still work on a non-admitted basis internationally--despite it being illegal in a number of countries. Since most countries' regulators and legislation actually ignores non-admitted contracts, tax has been overlooked too.
To cover the risk manager's potential IPT liability, always include a clause indemnifying the insured against any foreign taxes.
In the past 18 months, IPT has caught the attention of foreign tax authorities. The obvious reason is the growth of controlled master programs from abroad--and who better to tax than a foreign insurance company? But local insurers, through their national insurance associations, have also been lobbying their tax office for a fairer implementation of local taxes on overseas insurers.
Cases of the tax authorities' interest grow by the day. For example, authorities in Germany and elsewhere are writing to foreign insurers asking them to declare any risks covered in their territories. This includes signing statements of policy for dealing with the local IPT.
Many policyholders have also been asked to confirm the tax treatment on their coverage. This is leading many corporations and their captive managers to seek indemnities from their insurers.
Avoiding the Tax Man
IPT on international insurance has always been a complex and confusing area. With heightened interest from the tax man, however, this now has to be tackled. Policyholders and risk managers realize that they are on the firing line. Corporate governance requirements aside, the thought of overseas tax authorities imposing fines and penalties is focusing minds in the industry.
Risk managers should push their insurers or brokers to demonstrate that IPT is being handled. Otherwise, they may be surprised by a call from the inquisitive foreign tax man.
Richard Asquith is the managing director of TMF VAT & IPT Services, which assists with IPT compliance through its 79 worldwide offices. The TMF Group is a global independent management and accounting outsourcing firm.
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|Comment:||Overseas insurers: the regulations they face and the implications for you.|
|Author:||Dearie, John P.; Griffin, Michael|
|Article Type:||Industry overview|
|Date:||Jan 1, 2009|
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