Ensuring compliance of international insurance programmes: Eurasian countries

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Before the collapse of the Soviet Union and the declaration of independence of many former CIS countries in the early 1990-years, two state companies had a monopoly for all insurance business. Ingosstrakh wrote all reinsurance and international insurances requiring hard currency and Gosstrakh, sometimes via its branches of the Soviet network, covered domestic risks that could be insured internally.

Since gaining independence, the Eurasian countries have substantially been replacing and modernizing their insurance legislation inherited from the former Soviet Union. However, compliance with local legislation remains complex for multinational companies covered by international insurance programmes.

In general, there are multiple ways to cover a Eurasian risk of a multinational corporation under an international insurance programme. One can purchase insurance locally if the market capacity allows or install a local fronting policy and reinsure the risk to a central capacity provider. Other possible solutions include non-admitted insurance or coverage via a financial interest clause.

Local Market Placements

As in some other post-Soviet economies, insurance spending in % of GDP remains quite low, also impacted by constraints in macro-economic conditions, restricted bank lending, and currency devaluation. This results in market premium primarily depending on the compulsory classes of property and MTPL, supplemented by voluntary premiums across all classes related to the major corporate businesses in the oil, gas, energy, real estate and construction sectors.

However, usually local market capacity is not enough to cover large corporate risks of foreign direct investors. Additionally, the wordings do not match the standard of Western European countries and regulatory complications, such as the required filing of forms with authorities, make local market placements difficult or impossible. Therefore, brokers advising multinationals with business interests in Eurasia try to organize global coverage.

Non-admitted Insurance

Non-admitted insurance refers to placement of risks outside the regulatory system of the country where the risk is located and by an insurer that is not licensed in that country. Non-admitted insurance is not permitted in almost all the former CIS countries because the law provides that insurance must be purchased from locally authorized insurers. There are only some minor exceptions for highly specialized risks such as Marine and Aviation.

One exception is Armenia where a foreign insurer can transact business through its locally registered branch, which does not need to be locally capitalized. While foreign insurers are not allowed to market their products in Armenia without having a local license, anyone can buy, quite legally, a non-admitted policy. This is not market practice, and there might be significant practical obstacles for corporate businesses, such as not being allowed to consider non-admitted insurance premium as tax-deductible, and potentially having to treat incoming claims payments as income subject to local taxation.

When it comes to non-admitted insurance, the requirements of the law appear to be adhered to, since it is difficult to effect insurance other than with the locally licensed insurers in the absence of exchange control facilities for non-admitted placements. However, international firms that operate in the Stan-countries (Afghanistan, Kazakhstan, Kyrgyzstan, Pakistan, Tajikistan, Turkmenistan, Uzbekistan) are likely to arrange most of their insurances on a worldwide-program basis, placing only those parts of their covers with the local markets that they are absolutely obliged to. Technically, this may be strictly illegal under local law in some countries, since even DIC and DIL (Difference in Conditions/Difference in Limits) covers seem to be proscribed. But, certainly in the case of liability master covers, and particularly when neither premium nor claims recoveries are recorded through local accounts, the law is difficult to enforce.

In the strictly controlled economic and political environment, purchasers of non-admitted insurance are likely to face severe penalties for breaches of the law. Another potential solution could be central coverage via a financial interest clause.

Financial Interest Clause

A financial interest clause (FINC) is a provision within a global or master policy that covers the parent company’s diminution of financial interest when losses are suffered by its worldwide subsidiaries. A loss suffered by a subsidiary causes a reduction in the value of the parent’s financial interest in the subsidiary, for which the parent is indemnified under the FINC in its home country.

However, these are the top 4 limitations to keep in mind:

  • First, because the parent is the only insured under the FINC and the subsidiaries are not actually insured, claim payments must be made to the parent and not the local subsidiary that faced the damage.
  • Second, since the local subsidiaries are not the insureds, providing evidence of local coverage to third parties is not possible.
  • Third, any recovery under the FINC is limited to the parent’s interest, while the subsidiary’s actual loss could be greater than the parent’s financial interest loss.
  • Fourth, no premium should be allocated to or paid by local subsidiaries.

Given the above limitations, GrECo believes that local policies are the most secure option facilitating compliance, local servicing and claims payment in most jurisdictions, including the highly regulated markets of Eurasia. To overcome the capacity restrictions of local insurance markets, fronting solutions are the most feasible option.

Fronting

Fronting is a recognized feature in Eurasia for many of the larger risks, particularly those with an international connection, because of the general prohibition of placing non-admitted cover.

In most cases state insurers are the only authorized insurers in the country and should a risk require to be fronted, it would have to be through these companies. Some of the state insurers might require assistance in producing wordings for the more complicated risks but welcome every opportunity for involvement in international risk. This is not only for the premium it produces, but also for the access it affords to product innovations that might be turned to commercial advantage in the indigenous market. In the rare cases where there are also foreign licensed insurers the process is much easier since those are usually set up for this specific purpose.

Fronting, and reinsurance generally, are usually subject to a statutory minimum retention by the cedant, and in certain cases, subject also to a withholding tax. In some Eurasian countries the local law requires (re)insurers or reinsurance brokers to offer a certain percentage of the risk to domestic reinsurers before offering the risk to foreign reinsurers. Reinsurers used must have a good credit rating, usually better than A- or B+ Standard & Poor’s or AM Best. Additionally, the state insurers will require a fronting fee, usually in the range of 2.5% to 7,5%.

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