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India– Why Buy General Insurance Policies Locally?

It is a simple question. But, every simple question may not always elicit a simple answer particularly in binary terms.  Is it necessary for companies operating in India, whether Indian or foreign, to buy general insurance policies  locally? Before getting an answer to this question, we need to understand a couple of terms as mentioned below.

Admitted Insurance:

International Risk management Institute(IRMI) defines Admitted Insurance as under:

“Insurance written by an insurer licensed to do business in the state or country in which the insured exposure is located”

Non-admitted Insurance:

Non-admitted insurance refers to the placing of insurance outside the regulatory system of the country in which the risk is situated.

This subject of admitted or non-admitted insurance is relevant for companies having operations in multiple jurisdictions. It has been a regular business practice in the U.S. and Europe to insure assets or operations spread globally on a non-admitted basis through a global programme appropriately accompanied by a locally admitted insurance placement.

What is the position in India?

Section 25 of the General Insurance Business nationalization Act 1972, states as under:

“Properties in India not to be insured with foreign insurers except with permission of the Central Government:

(1) No person shall take out or renew any policy of insurance in respect of any property in India or any ship or other vessel or aircraft registered in India with an insurer whose principal place of business is outside India save with the prior permission of the Central Government.

(2) If any person contravenes any provision of subsection (1), he shall be punishable with Imprisonment for a term which may extend to one year, or with fine which may extend to one thousand rupees, or with both”

Further, reference is also invited to Reserve Bank of India (RBI) circular no. RBI/2016-17/ 137 dated  November 17, 2016 – A.P.-  (DIR New Series) Circular No.18 [(1)/12 (R)] on the subject of Foreign Exchange Management (Insurance) Regulations, 2015. Provisions relating to policies from Insurers outside India are as under:

Memorandum of Foreign Exchange Management Regulations Relating to General/Health Insurance in India (under sections 3, 4, 5 and 6)

3. General/ Health Insurance policies from Insurers outside India

i) A person resident in India may take or continue to hold a health insurance policy issued by an insurer outside India provided aggregate remittance including amount of premium does not exceed the limits prescribed by RBI under the Liberalised Remittance Scheme (LRS) from time to time.

ii) Units located in SEZs may take or continue to hold general/health insurance policies from insurers outside India subject to IRDAI Guidelines and Central Government rules provided the premium is paid by the units out of their foreign exchange balances.

iii) No person shall take out or renew any policy of insurance in respect of any property in India or any ship or other vessel or aircraft registered in India with an insurer whose principal place of business is outside India without permission of Insurance Regulatory and Development Authority of India (IRDAI).

iv) A person resident in India may take or continue to hold a general /health insurance policy  other than the ones referred in (i) to (iii) above, issued by an insurer outside India, provided that, the policy is held, under a specific or general permission of the Central Government.

v) A person resident in India may continue to hold any general/health insurance policy issued by an insurer outside India when such person was resident outside India.  In case the premium due on a general/health insurance policy has been paid by making remittance from India, the policy holder shall repatriate to India through normal banking channels, the maturity proceeds or amount of any claim due on the policy, if any, within a period of seven days from the receipt thereof.

4. All risk insurance policies

Insurance on Indian marine hulls covering All Risks against war and other allied risks (arising out of civil commotion, political or labour disturbances etc.) is required to be obtained only from the Insurers in India.

5. General/ Health Insurance policies by Indian Residents

Resident of India may take general/health insurance policy permitted by IRDAI from Indian insurer on payment of premium in INR, where claims arising under the policies outside India are to be settled in foreign currency.

6. General/Health Insurance policies by Residents outside India

Resident outside India may take general/health insurance policy as permitted by IRDAI from Indian Insurers. Claims arising under the policies are to be settled in INR if  payment of premium is in INR  and in any currency if payment of premium is in foreign currency. However, Insurance cover on risks inside India (including All Risks Insurance) on assets in India owned by Indian branches/offices of foreign companies, banks, etc., may be issued only in INR.”

As regards policies to be obtained in India, while the provisions refer to specific classes of insurance business, the deduction is that other classes such as liability insurance are also subject to these provisions.

In view of the above, it is advisable to obtain general insurance policies including liability insurance policies locally in India. Some of the consequences of not taking insurance locally are as follows (list not exhaustive):

  • It would be a violation of the laws of the land inviting avoidable consequences and punishments.
  • It is not a good corporate governance practice, as compliance issues are involved.
  • A foreign insurer paying claims money to an entity in India may be seen as making an unapproved transfer of funds, since primary requirement of policy being taken in India has not been complied with. It may attract FEMA provisions.
  • The amount received as claim may be taxable for the Indian entity as an “Income”.

Governments world over, increasingly wedded to protectionist trends, like to maximise any available tax revenue. Subsidiaries of foreign companies do come under increased scrutiny in this matter. Allocation of insurance expenditure made and debited to the subsidiary also becomes an important aspect for scrutiny. In this context, while the recent order of Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has not gone in favour of Income Tax authorities in M/s Adidas India Marketing (P.) Ltd. vs. Income Tax Officer, it makes an interesting reading offering useful insights. This is what the the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has stated in its order.

“The Adidas AG has paid premium separately for the Global insurance policy and no part of the same has been allocated to the assessee or reimbursed by the assessee. Under the Global insurance policy, which was entered between Adidas AG and Zurich insurance, privity of contract was between the said two parties, without assessee being a party”

“Further, we agree with the contention of the Ld. counsel of the assessee that insuring the financial interest in the subsidiary by M/s Adidas AG is not a tax avoidance scheme and the policy was taken to cover the contingent losses that may or may not arise in future. We find that M/s Adidas AG has paid premium in respect of the policy from time to time and also paid tax in Germany in relation to the amount in question of insurance claim. We reject the observation of the lower authorities alleging that colourable device was adopted by the assessee for evading taxes in India.”

“9.5 In view of above discussion, we are of the opinion that claim of insurance received by M/s Adidas AG is not taxable in the hands of the assessee either under section 5 or under section 9(1)(i) of the Act. The grounds of the appeal raised by the assessee are accordingly allowed.”

A few words about Global Insurance Programmes: While the Indian position being what it is as explained above, it is not that sourcing insurance locally is mandatory in all countries. Companies can consider global insurance programmes without violating the applicable local laws. IRMI defines global insurance programme as “an insurance program with a coverage territory encompassing the entire world, including the country in which the insured is domiciled, that is arranged for a multinational business”

Global insurance programmes, cost effective and cover maximising as they are, can be considered and evaluated on the basis of understating of the local laws. Since the issues of admitted insurance and tax liability are complex , insureds need to analyse the possible consequences of structuring a global insurance programme when a parent company and its operations across various jurisdictions are to be covered.

P. Umesh
Consultant- Liability Insurance
www.liabilityinsurancepractice.com

Disclaimer: The information contained and ideas expressed in this article represent only a general overview of subjects covered. It is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insurance buyers should consult their insurance and legal advisors regarding specific coverage and/or legal issues.