Sophisticated buyers of multinational insurance programs demand that their insurers provide consistent coverage of their worldwide exposure to risk. Multinational insurers typically respond to these demands in one of two ways: either by offering stand-alone local policies with appropriate local coverage grants and limits, or, by offering a traditional master insurance policy for the parent company, with local policies for the parent’s various foreign subsidiaries, affiliates, and joint ventures. The master policy fills the coverage gaps in the local policies and provides the certainty of expected insurance coverage, with consistent terms and conditions applying to the worldwide exposures of the buyer.
Multinational enterprises also demand execution certainty with respect to claims handling and indemnification. Regardless of whether the insured has purchased a master policy for the parent company, or a series of local policies for its subsidiaries and affiliates, the insured does not intend to assume regulatory and tax risks. Indeed, sellers, purchasers, and intermediaries all want their insurance products to be materially compliant in all jurisdictions in which they are subject to regulatory and legal oversight. Yet, these programs all raise significant compliance issues, particularly income tax issues. In this paper, we seek to review some of these issues, particularly the complex issue of transfer pricing. Following a summary of how multinational insurance programs work, we discuss the importance of using an arm’s-length, bargained-for exchange standard for allocating premium and loss recoveries. Entering into an arm’s-length, bargained-for exchange, objectively documenting the negotiations, and having an unrelated, independent third party assess the risks involved, are all critical elements of any successful transfer pricing analysis. This article ends with a consideration of factors that risk managers and their financial colleagues should consider with respect to transfer pricing, when designing and implementing a multinational insurance program.