Last month we visited a risk management issue as varied and different as the preceding months, indeed risk management is in the eye of the beholder.   This month we look at a more traditional risk of international insurance and the application of due diligence controls.

The study was conducted by Bevan Brown, from Adelaide and is titled "International Insurance, Due Diligence Controls" the major aim of the project was to identify the legislative requirements that a company will need to observe to be authorised to carry out business in various part of the world.  In order to research the above topic it was assumed that the requirements of each nation are different; accordingly the industry is in need of a method to readily establish the minimal technical and legislative requirements of each area of influence.

It was decided to take a cross section of countries in order to make the project manageable and time bounded, these countries were Australia, New Zealand, Papua New Guinea, Singapore, Sweden, Germany, New Zealand and The United States of America state of California.   Each of these areas was examined under the broad areas of insurance legislation and accounting protocols.

The report methodology consisted of a staged examination process as follows:

Stage One:       Obtaining the various countries legislation for review and ascertaining under what conditions they might apply.

Stage Two:       Ascertain the type of legislative framework applicable.

Stage Three:     Identification of any penalty provisions.

Stage Four:       identification of any special matters of relevance to the topic that might have a bearing on the findings.

In addition a glossary of "defined terms" was used to identify commonality between insurance acts and accounting protocols across all areas under examination.   The use of a generally accepted glossary showed that there existed a degree of confusion in accepted terminology between the various industry legislation, accounting protocols and regulatory authorities across the various countries.

As an example, aspects that affect the insurance industry in Australia and Sweden were studied.

In Australia Commonwealth and State legislation have controlled the insurance industry from the early days of federation.  The most recent legislation which effectively controls the operation of insurance companies are Commonwealth based and are:

1.         Insurance Act 1973 (reprinted 31 August 1992).

2.         Insurance Contracts Act 1984.

3.         Insurance (agents and brokers) Act 1984.

Additionally State Governments have Acts that control stamp duty payable by insurers; consumer legislation, which is constantly evolving also, has a direct impact on the industry.

Australia, likewise has accounting protocols that have a direct effect upon the operation of insurance companies as they set accounting standards and interpretations in how to value assets.

These regulations are expressed in AAS26 and AASB 1023 and have had a major effect on reserve and declared profits of Australian incorporated insurance companies.

Sweden, likewise has regulated the insurance industry since 1838 in one form or another but has had a consistent view that the regulation must be based upon the principle of market contestability and concentration.

This is defined "A perfectly contestable market is one that is freely accessible to entrants without any barriers of entry to potential entrant" (Baumol, Panzar and Willy, 1982)

Barriers to entry did exist in Sweden prior to 1985, as follows: 1.  The regulatory system.  2.  High fixed costs of establishment and 3.  Brand loyalty built up over many decades of operation.

Since 1985 the regulatory barriers have been lowered, thus the authorities no longer freely support cooperation between Swedish companies which has allowed easier entry to new players.   The lowering of barriers though has not had a totally positive affect and when coupled with the economic decline of the late 80's has led to an increase in company collapses.

The Swedish Financial Accounting Board who issued a series of recommendations to the industry in 1991 governs insurance accounting.

The report reached the following conclusions:

1.         That there is difficulty in implementing a due diligence plan with applicability worldwide.

2.         There is a need to complete a universal standard of accounting protocols to enable like to be compared with like.  This is not going to  happen in the short to medium term because of the different interpretations of accounting worldwide.

3.         All legislation needs to be review across borders in order to keep the industry viable across borders.

4.         All legislation worldwide needs to have direct or indirect avenues for client protection in the event of company insolvency.

5.         That the tax advantage of some areas was beneficial to some players.Paradoxically, the management requirements were most technically sound in the area of most tax advantage.           

In summary it will take a great deal more research to identify the areas needing commonality, cooperation and development to produce a due diligence program that has applicability to the insurance industry worldwide.