Global insurance programmes fail to protect local subsidiaries – especially in Africa

Global insurance programmes do not protect local subsidiaries in many parts of the world. This is especially the case in Africa where almost all countries insist that local coverage must be arranged. Failing to arrange cover locally can create a myriad of regulatory and tax challenges, particularly when it comes to claims payments.

While the nature and severity of the penalties vary from country to country, they can involve substantial financial fines or even terms of imprisonment of five years or more.

Yet for certain covers, such as directors and officers liability, it is estimated that only about 25% of large publicly-traded US companies comply with local insurance regulations. Also, according to Axco Insurance Services, of the 164 countries that they have researched, only 57 allow cover to be placed outside of the country - with virtually all African countries insisting that local coverage be arranged.

“Unless cover has been arranged in a correct manner locally, claims payments arising under global programmes will be made to the parent company which then has to find a way of transferring the proceeds to its local subsidiary - often involving complex regulatory and tax hurdles” warns Michael Duncan, Executive Leader of Alexander Forbes’ Global Practice.

Often multinationals either do not understand the risks involved or take a conscious decision that the risks are too remote to justify the cost of effecting local insurance.

The 1984 Union Carbide poison gas leak in Bhopal, India, which killed some 15000 people and injured many more, highlights the need for adequate and compliant local cover wherever a multinational organisation operates. Union Carbide’s culpability is still the subject of civil and criminal litigation in India and the US over 25 years later.

In some cases, organisations fail to effect local cover because they are concerned that, by doing so, they will attract penalties for past non-compliance. In practice, however, this is a remote risk since regulators tend to focus on the current year.

That said, “if a large insurance claim alerts the regulator to the fact that the organisation has been contravening local insurance regulations, then there could well be penalties for past years’ infringements” warns Duncan. Certainly, it is quite likely that a large loss will be brought to the attention of the regulator, particularly in the smaller insurance markets.

Also, if a multinational organisation ignores local insurance regulations it does beg the question, what other regulations is it failing to comply with? Also, is it the type of organisation an insurer should be underwriting or a country allowing to invest?

As such, Duncan recommends that multinationals approach intermediaries with a network of offices and correspondents around the world. These should be able to provide current and accurate information on local insurance regulations and how best to legitimately access global insurance programmes.