Insurance Advisory Newsletter – Locally Admitted Policy Vis-À-Vis Global Insurance Policy : Jan 2024
Locally Admitted Policy Vis-À-Vis Global Insurance Policy
Globalisation has led to companies operating in multiple nations, increasing their exposure to risk
in multiple jurisdictions. To counter the probable risks in conducting business at such a global
scale, the need for a ‘Global Insurance Policy’ (“Global Policy”) arose. A Global Policy essentially
covers risks throughout the widespread jurisdictions around the world. Therefore, it has a wider
domain, and it provides a blanket cover for all the entities of a company (including affiliates and
subsidiaries) wherever such affiliates and subsidiaries are operating.
However, to cover the claims for events happening in certain jurisdictions that operate as
admitted insurance markets, there are locally admitted policies available to cover the appropriate
risks for the local entity (“Insured”).
Admitted And Non-Admitted Markets
● Admitted insurance market – An admitted insurance market prohibits the purchase of
Global Policies from any insurer not licensed to operate in the same jurisdiction to place an
insurance program for the Insured. Only those insurers who have obtained a license to
transact their business in such jurisdiction may operate with the express authorisation of
the statutory regulator.
Example: India is an admitted insurance market. This means that only an insurer who has
obtained an appropriate license from IRDAI can issue policies for risks emanating in India.
● Non-admitted insurance market – In a non-admitted insurance jurisdiction, insurers from
around the globe may operate and cover risks arising in any jurisdiction. Hence, the Insured
may avail a Global Policy to cover both domiciled and global risks in their business
operations and do not need to obtain express authorisation.
Example: The USA is a non-admitted insurance market, meaning an Indian insurer may
cover risks arising in US territory.
What Is a Locally Admitted Policy (“LAP”)?
A LAP refers to an insurance policy issued by an insurer who has been expressly authorised by
the territorial insurance regulatory authority to operate and cover risks and place insurance
programs for entities operating and conducting business in that local territory.
Since India is an admitted insurance market, an entity incorporated or conducting business in
India must mandatorily purchase LAP to cover risks arising in India.
From a statutory compliance standpoint, Regulation 3 of the Foreign Exchange Management
(Insurance) Regulations, 2015, and RBI Master Direction on Insurance, 2016, specifically state
that local companies cannot avail or place insurance programs through a foreign insurer without
explicit permission from IRDAI. However, such permission to take insurance from foreign insurers
is provided only in the “rarest of the rare” instances. Hence the standard position is that an entity
in India is required to procure a LAP in India to ensure that it covers its local risks.
Some of the consequences of not procuring LAP are listed below:
● It would be a violation of the laws of the land and is generally not considered a good
corporate governance practice.
● Penalties could be imposed for violation of statutory laws.
Therefore, to comply with the statutory requirements, Insured must procure a LAP to cover the
risks underlying in the jurisdiction where it is conducting its business. For all the multinational
companies having subsidiaries in India, it is mandatory to procure a LAP in India even if they are
covered in their global insurance program.
Benefits Of LAP
Numerous MNCs, with worldwide operations, establish subsidiary entities in different countries. If
such subsidiaries operate in admitted insurance markets, they must procure LAP in order to
comply with the statutory compliances and avail the two-layer protection. The ‘two-layer
protection’ that admitted insurance markets provide to a subsidiary or affiliate operating in India is
as follows:
● Firstly, LAP provides insurance coverage for losses domiciled in India up to its full limits;
● Furthermore, once the LAP limits are exhausted, the Global Policy availed by the holding
company is triggered to cover the losses or damages incurred over and above LAP.
Essentially, the subsidiary functioning in an admitted market is protected from two ends, i.e., the
LAP and the holding company’s Global Policy.
Strategically procured LAP provides the most basic coverages, for comparatively cost-effective
premium obligations. In this way, the Insured can be both statutorily compliant and secured from
risk exposures locally.
However, in the event of a claim, the LAP can cover the same up to its limit exhaustion and
thereafter, the holding company’s Global Policy can mitigate the risk exposure locally as well as
globally.
