Is Non-Admitted a Non-Starter? Global Programs & Staying Legal

in 21st Century4/29/08

9:00 AM – 10:30 AM

Evolution of Traditional International Programs

• Locally Admitted• Non Admitted• Difference in Conditions/Limits• Controlled Master Program

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International Markets

Market Tier U.S. HeadquartersHeadquartered Outside

U.S.

Tier I AIG WorldsourceFM Global*

ACEZurich

Tier II ChubbCNA

Allianz*XL Global

Tier III Liberty MutualTravelers

* Property Only Plus AXA, Royal & Sun Alliance, HDI/Gerling

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Why Is Carrier Ownership Important?Carrier Owned

CountriesAffiliated Countries

Total Countries

ACE 52 100 152AIG 89 50 139Allianz 52 100 152AXA 30 50 80Chubb 28 100 128CNA 14 95 109FM Global 25 90 115Liberty 24 112 136Travelers 3 90 93XL 25 75 100Zurich 38 126 164

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Managing the Admitted vs. Non- Admitted Process

• Compulsory coverages – What are they?• Non-admitted permitted?• Options to countries where non-admitted

is prohibited?– FOS Policy– Direct Writing Captives

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Recent Trends in International Programs

• Passport

• Advantage

• MIP

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Keeping Legal: Are Fines and Penalties and Imprisonment Real?

Netherlands Singapore Finland BruneiGermany MalaysiaUKIndia Canada South Africa Puerto RicoKazakstan

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New Ways of Structuring International Insurance Programs

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Agenda

1. Traditional international insurance Program Business – How non-admitted can be a non-starter

2. Possible legal solution approaches

3. How Zurich is starting up its international insurance program business for the 21st century – a look into Zurich MIP

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Model of traditional international insurance program

Provision of insurance cover by one insurance carrier for a multitude of risks, legal entities, persons (e.g. D&O) located in a multitude of countries on a DIC/DIL, sometimes even ground up basis.By operation of including such risks as “co-insured” under the master policy and/or by providing for worldwide cover, the Master Policy Issuer either covers risks or becomes active as an insurer in the respective countries, where risks are located.

Local Policies

Mas

ter P

olic

y Is

suer

Spain

Malaysia

Russia

Japan

China

Provision of DIC, DIL, Excess etc.into foreign jurisdictions

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Traditional International Program Business How non-admitted can be a non starter…

Legal, regulatory, licensing and tax requirements sometimes are attaching to the location of insured risk, sometimes to the place of the insurer’s insurance activityIdeal legal solution would often be: Issuing of local policies in all jurisdictions, where risks are locatedEconomic problems with such solution: Aggregation, (inadequate) local capacities, language, tax and many more…

These difficulties led to a practice, under which first named insureds are provided with master policies, and eventually with local policies; This practice creates gaps in insurance coverage between local and master policies;Risk managers, understandably, want to close gaps.

As a consequence, global insurers are covering risks of the insured’s group “worldwide”, be it - from the first dollar, or - on top of local policies

Many foreign jurisdictions perceive this to be the conduct of Insurance business, which may be

- subject to local authorization (license), - subject to local taxation, - subject to other mandatory requirements

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Examples of Countries Prohibiting Non-admitted InsuranceBrazil:

Art. 1 of Law Decree No. 73 of 1966 Art. 113 Law Decree No. 73 of 1966 Art. 19 of Complementary Law No. 126 of 16 Jan. 2007 Art. 20 of Complementary Law No. 126 of 16 Jan. 2007

China:Circular 2002 No.112 of the China Insurance Regulatory Commission

Japan:Article 186 Paragraph 1 of the Insurance Business Law

Russian FederationArt. 4 par. 5 of the Law in Organization of the Insurance Business in the Russian Federation

Switzerland:Article 3 in connection with Article 2 of the Swiss Insurance Supervision Law (Versicherungs-aufsichtsgesetz, VAG) of December 2004

IndiaForeign Exchange Management (Insurance) Regulation 2000

Malaysia:Section 9 of the Malaysian Insurance Act 1996Section 40 of the Malaysian Insurance Act 1996

Mexico:Article 3 of the General Insurance law

TurkeyArt. 2 and 29 of the Insurance Auditing Law no. 7397

Thailand:The Non-Life Insurance Act B.E. 2535 (1992)

Hong Kong:Section 6 of the Insurance Companies Ordinance

Such rules normally apply to any conduct of insurance.Before there is proof to the contrary, such rules also do apply to Difference in

Condition (DIC), Difference in Limits (DIL);There is discord between modern global insurance structures provided (International Program Business (IPB), Excess Layers, DIC / DIL, Co-insurance etc.) and existing mandatory legal, regulatory and tax requirements. 12

Traditional International Program Business So what will happen?

Regulatory QuestionsNullity of cover as a consequence – does anyone mind?

“I thought I have worldwide cover…?”Refunding of paid claims and premium Penalties and fines?

Audit QuestionsThe Audit Committee, internal/external Audits and SOX

Contractual and Coverage QuestionsCross border recognition and enforceability of clauses in front of courtsLoss of objections under contractsCan reinsurers decline non-admitted claims (ex gratia payments)?

Corporate QuestionM&A or Portfolio transfers - E.g. UK FSMA 2000 - Part 7 transfer.

Claim Payment QuestionsWhere risk location is attachment point for regulation and tax, claims often can’t just be deviated into “admitted” jurisdictionSmooth claim payment as the “proof of the pudding” 13

Traditional International Program Business So what will happen? Tax Questions:

• The Kvaerner Case (ECJ 191/99) confirmed by the DSG Case (UK Tax Tribunal)

in EU IPT to be paid at location of risk

• German Tax Authorities sending letters to foreign insurers (see fig.1)

• Is the right entity (of the insurer’s group, or of the insured’s group…) paying the tax?

• Is the correct amount of premium allocated to the respective risk coverage …

• Is there need to have a tax representative in any particular jurisdiction …?

• Interrelation between local tax authority and local regulator - and what, if I am not licensed there, or: How are taxes paid, if there is a license infringement?

fig.1

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Global Corporate in Europe / SignorettiS / 27 06 2006

SW-ZIC155-20060927-MOA-TMG

Solution Crafting – Common Legal Principles Apply Globally How non-admitted can work under circumstances…

Legal, regulatory and tax requirements

All these principles apply for any layer of direct insurance.

Steps to satisfy requirements

• Risks must be– Identified and– Allocated to the country where the

risk is situated• Risk adequate premium apportioned per

country of risk/contract/line of business• Tax laws in any country checked and

any insurer due taxes paid according to the relevant tax laws of the country

While each country has its own rules and regulations there is a set of common legal principles that are undisputed (see also Licensing standard of the IAIS,1998)

• Regulatory laws in countries must be adhered to

• Licenses must be held unless a legal exemption applies

• Mandatory coverage in countries of risk must be granted

Most of these principles have already been part of an underwriting standard in many places.

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Modules of Zurich’s internet matrix

1. Legal - providing up-to-date regulatory requirements and licensing information - country-by-country - by Line of Business - by 5 common Business Scenarios

2. Tax and Administration – allocating and paying taxes. Admin and documentation

3. Tax Reporting

Researched, maintained and updated constantly (Legal and tax experts)

Accompanied by underwriting rules

Zurich’s Solution Crafting Tool

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Solution Crafting Process

Tax

1

Business Scenarios

2Allocate risk exposure to country of risk

4Solution Crafting

3Country Mapping

5Tax payments & records

19© Zurich -

LPF

LP D

LPI

LPUSA

Example of a solution

Master Switzer-

land

AUHK

CNDCount ries that allow

non-admit ted

LPLP

LP

USIR

SK J C

Financial Interest Cover to protect parent ‘s

interest in case cover and/or limit s can not be

fully exported

LP = Local policy

LP LP LP

EEA => FoSDIC / DIL

2

19© Zurich -

LPF

LP D

LPI

LPUSA

Example of a solution

Master Switzer-

land

AUHK

CNDCount ries that allow

non-admit ted

LPLP

LP

USIR

SK J C

Financial Interest Cover to protect parent ‘s

interest in case cover and/or limit s can not be

fully exported

LP = Local policy

LP LP LP

EEA => FoSDIC / DIL

2

Structure:In which scenario is insurance coverage beinggranted – to which extent is the insurer active abroad?

Underwriting:To what extent need foreign risks to be covered and in which countries? What with gaps in cover?

MIA Analysis:By Lob andby business scenario:What is permitted and what is not?

Deal Structuring:Insurance program structuring with the available uwr and legal tools: master, local, FOS policy, FInC etc.

Tax:Allocation of adequate premium to cover. Taxation of same by insuring entity in correct jurisdiction byusing designated means for payment.

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Solution Elements (I and II) Freedom of Services (FOS) & US Insurance Rules (USIR)FOS

The freedom to provide insurance services across all countries of the European Economic Area (EEA) is based on the EU’s non-life insurance directives.

Insurer Requirements -Established in the EEA -Licensed in the LOB and notified across the EEA

Risk Requirements -Located in the EEA -Reasonable and fair premium allocation -Taxes collected and paid -Tax and/or claim representatives are required

Local Requirements Mandatory covers, pools and other local provisions must be considered in the policy wording

USIR

Regulatory: without state-specific license, insurers are often prohibited from conducting insurance business basically: local policy requirement

However, different exemptions exist (e.g. industrial insured exemptions, marine exemptions, direct placement laws, self procurement laws, etc.)

State Board of Ins. V. Todd Shipyards Corp., 370 U.S. 451 (1962) still upheld

Tax: doing business in any US State can attract Insurance Premium Tax (IPT) on both the insurer, the insured or the broker

Nonadmitted Insurance and reinsurance reform Act (H.B. 5637) of 2007 – where will it go?

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Concept of the Financial Interest Cover:Insurance for the assets of the parent

Policyholder / Parent-Exclusive insured-Payment of premium and claims

Asset ValueInvestmentShareholding

In countries not permitting any cross border solution:NO Insurance on top of local policies

In so far as losses remain uncovered ( )beyond any local policy limit or condition, there is a decrease in valueof the shareholding or investment

It is accepted today that the parent company has an insurable interest in safeguarding its investments, participation and other financial stakes in its subs.

Where such subs can suffer any decrease in value, such decrease is reflected on the parents balance and it presents an insurable financial interest, not to suffer such loss at its own level.

Measurement of loss by means of valuation clause.

Insurance is provided under “home” financial loss license and for Policyholder exclusively

Location of Insured Asset

Solution Elements (III) Financial Interest Cover

Country X

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LPF

LP D

LPI

LPUSA

Master Policy

in client’s home

country

AUHK

CNDCountries that allow non-ad- mitted

LPLP

LP

SK J C

Financial Interest Cover to protect parent‘s interest in case cover and/or limits can not be fully exported to prohibiting countries

LP = Local policy

LP LP LP

EEA => FoSDIC / DIL

Possible MIP Solution, or: Non-admitted can work, where permitted… and it’s a non starter, where it’s not permitted

USIR (DIC/DIL on top of LP US)

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ROYAL DUTCH SHELL PLCGlobal Insurance Program

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Shell’s Global Operation

Shell is a global group of energy and petrochemical companies. We are active in more than 130 countries and territories and employ 108,000 people worldwide.

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Shell procures Insurance Coverage for

• Property (onshore & offshore) including control of well

• Liabilities• Construction (onshore and offshore)• Marine coverages• Credit, Aircraft, etc.• Directors and Officers insurance

Shell uses its Captives to write this business where possible 23

Increased emphasis on Compliance...... Extensive Internal Audits/External Audits/Sarbanes Oxley

ComplianceCompliance is a must – in addition to audits, we do the following: - Approved fronter register – financial security is assessed annually prior

to renewal- Legal and Tax review annually before renewal for change in legislation- Tax remittance handled locally or at Solen for direct policies- Market policies – Legal and tax review prior to committing Solen capacity

(case by case)

Staying legal is robust due diligence and continuous market research

Governance & Sarbanes Oxley Compliance

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What Does an Insured Want ?

• Appropriate, legally binding coverage• Claims that are being paid locally• Compliance with local laws, taxes remitted

correctly • No surprises

Because Shell has an internal Risk & Insurance department that places the business with the captives or the market, the expectation is that coverage is appropriate, legally binding and claims will be settled.

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Key features of Shell‘s Global Insurance Program

• Significant local business retentions (up to USD 20M)

• Standard property coverage (USD 250M) - policy issued locally evidencing this limit

• Excess property coverage for large exposures (up to USD 1150M) – policy issued locally evidencing this limit

• Standard liability coverage for each operating company – policy issued locally

• Group captive (Solen) purchases reinsurance to protect its balance sheet

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Global Insurance Program

AIG Europe London AIG Network

AIG Bermuda

Solen Insurance

Insured

Premium payment$$$

Premium payment

Premium Advice$$$Premium

Transfer to Solen

Cash Flow

Documentation Issue/Invoicing

Instructions, Account

management Instructions

Policy

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Start review

Yes Yes

No

No

Financial Security review passed?

Yes

Yes

No

No

Who will issue?

•AIG Network

•US Insurer (Noble)

• Other.

Update files, issue policy

Issue policy

Issue policyIssue policy

Input from Broker/Service provider

Annual legal, regulatory and insurance tax compliance review:

Alternatives ?

Change in tax rate?

Direct issuance possible ?

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29 April 2008

The Shell insured risks are currently split as follows:

Separate program for D&O: Central policy covers 9 countries and locally admitted policies for 122 countries

Channels of Policies issued

22%

48%

5%

25%Direct (30 Countries)

AIG (106 Countries)

Other Cedants (22Countries)Market placements

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Global Program – Allocation of Premiums to Operating Units

Don‘t forget the other taxes....

Income tax considerations• The allocation of premiums to the territories must not be

performed by the parent arbitrarily. Otherwise, tax authorities may consider premiums not arm‘s-length, which means that the expense cannot be deducted for income tax purposes!

• Obtaining quoted market rates for each risk will ensure that an appropriate, fair premium is charged locally. 30

Claude F. GallelloManaging DirectorWillis InternationalTEL: 212-915-7745EMAIL: claude.gallello@willis.com

Martin StrnadLegal Counsel EuropeAttorney-At-LawZurich Insurance CompanyTEL: +41-44-625-2517EMAIL: martin.strnad@zurich.com

Andrea KorolukInsurance ManagerSolen Versicherungen AG(A Shell Group Company)TEL: +41-41-769-4156EMAIL: andrea.koroluk@shell.com

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Is Non-Admitted a Non-Starter? Global Programs & Staying Legal

in 21st Century4/29/08

9:00 AM – 10:30 AM

32