Start Here: 5 Things You MUST Know
Expropriation = government takes property, often NO compensation. Eminent domain = MUST pay fair value
Three accounting standards: SAP (U.S. regulatory), GAAP (U.S. investors), IFRS (international)
Territorial tax = only domestic income. Worldwide tax = all income everywhere
Currency risk can create unexpected gains or losses when premiums and claims are in different currencies
Bearer shares = anonymous ownership. Registered shares = name on record. Tax havens use bearer shares for privacy
1. The International Insurance Market
The international insurance market has two segments: life insurance and nonlife insurance (property-casualty). Major players come from the U.S., UK, Germany, Switzerland, France, Japan, and increasingly China.
Major Insurers and Brokers
Major Insurers
- Lloyd's of London (UK) — unique marketplace, not a single company
- Munich Re, Allianz (Germany)
- Swiss Re, Zurich (Switzerland)
- AXA (France)
- Ping An, China Life (China — now among world's largest)
Major Brokers
International brokers facilitate risk placement across borders.
- Marsh
- Aon
- WTW (Willis Towers Watson)
Note: Significant broker consolidation has occurred since 2008.
Real-World Scenario: Why International Brokers Matter
The Setup: A U.S. manufacturer with factories in 12 countries needs property and liability coverage in each location.
What Happens: An international broker like Marsh coordinates the entire program — placing coverage with local admitted insurers in each country, arranging a master policy for gaps, and negotiating reinsurance.
The Result: Without the broker, the manufacturer would need to separately navigate insurance regulations, languages, and markets in 12 different countries. The broker's global network and local expertise makes it possible.
2. Currency and Foreign Exchange Risk
Pegged Currency
A currency whose value is fixed (pegged) to another currency, typically the U.S. dollar or Euro. The government says: "1 of our dollars always equals X of their dollars."
Why Currency Risk Matters for Insurance
Premiums may be collected in one currency, claims paid in another. Exchange rate fluctuations can create unexpected gains or losses that have nothing to do with underwriting performance.
Real-World Scenario: Currency Risk in Action
The Setup: A U.S. insurer writes a policy for a UK company. The premium is 1 million British pounds.
What Happens: When the policy was written, 1 GBP = $1.50, so the premium was worth $1.5 million. Six months later when a claim is paid, 1 GBP = $1.30.
The Result: The insurer received $1.5M worth of premium but claims are now valued in cheaper pounds — a gain in this case. But it could easily go the other way, creating an unexpected loss.
3. Expropriation vs. Eminent Domain
Expropriation
Government's lawful acquisition of property without the owner's consent, and often without compensation. The government takes your property and you may get nothing.
Example: A new government nationalizes all foreign-owned financial services. The U.S. insurer loses its buildings and subsidiary with no payment.
Eminent Domain
Government's power to confiscate private property for public use. The U.S. Constitution requires just compensation — the government MUST pay fair market value.
Example: A city needs land for a highway. It takes a homeowner's property but pays appraised market value.
Real-World Scenario: Political Risk Insurance
The Setup: A U.S. insurance company owns office buildings and a subsidiary in Country X.
What Happens: A new government comes to power and nationalizes all foreign-owned financial services companies.
The Result: The insurer loses everything with no compensation. This is why political risk insurance exists — to protect against exactly this scenario. Recent examples include Russia seizing foreign company assets after 2022 sanctions.
4. Accounting Standards: SAP, GAAP, and IFRS
SAP
Statutory Accounting Principles
Used in the U.S. for regulatory reporting to state insurance departments. Conservative — focuses on ability to pay claims (solvency). Excludes "non-admitted" assets like furniture and goodwill.
GAAP
Generally Accepted Accounting Principles
Used in the U.S. for financial reporting to investors. More complete picture of profitability. Includes assets that SAP excludes.
IFRS
International Financial Reporting Standards
Used in most countries outside the U.S. Set by the IASB. Required in the EU, UK, and many other jurisdictions. IFRS 17 (2023) is a major overhaul for insurance contracts.
Real-World Scenario: Same Insurer, Three Different Reports
The Setup: A global insurer headquartered in London has a U.S. subsidiary. It collects $100M in premiums.
What Happens: The insurer must prepare IFRS statements for UK regulators, SAP statements for U.S. state regulators, and GAAP statements for U.S. investors.
The Result: The same $100M in premiums can produce different profit figures under each standard because of how they treat reserves, investments, and expenses. The insurer may appear profitable under GAAP but financially strained under SAP, or vice versa.
5. International Taxation
Five Approaches to Taxing International Earnings
Territorial Tax
Only taxes income earned within the country's borders. Earn it abroad? Your home country does not tax it.
Worldwide Tax
Taxes all income regardless of where earned. The U.S. traditionally used this (now modified territorial).
Border Tax Adjustment
Taxes applied to imports and removed from exports. Like a VAT adjustment at the border.
Earnings Stripping
Tax avoidance strategy. Company reduces taxable income by making excessive interest payments to a related company in a low-tax country.
Inversion (Expatriation)
Company reincorporates in a foreign country with lower taxes. Moves legal home but keeps U.S. operations. Largely curtailed by legislation.
Tax Havens and Key Terms
Tax Haven
A country with very low or no taxes that attracts foreign businesses to incorporate there (e.g., Bermuda, Cayman Islands).
When establishing a subsidiary in a tax haven, consider:
- Tax structure and privacy law enforcement
- Language and judicial system type
- Political stability and independence
- Costs of establishing the subsidiary
Transfer Price
The price one subsidiary charges another of the same parent for goods/services. Can be manipulated to shift profits to low-tax countries.
Repatriation of Earnings
Moving earnings from foreign affiliates back to the U.S. parent. Some countries restrict or tax this.
Registered Shares
Stock certificate with the owner's name officially recorded in company books. The company knows who its owners are.
Bearer Shares
Ownership belongs to whoever physically holds the certificate. No registered owner — provides anonymity. Now banned or restricted in most jurisdictions due to AML rules.
Cheat Sheet
Print this page for quick referenceFinancial Risks
- Currency risk = premiums/claims in different currencies
- Pegged currency = fixed to USD or Euro
- Expropriation = government takes, often NO compensation
- Eminent domain = government takes, MUST pay fair value
Accounting Standards
- SAP = U.S. regulatory, conservative, solvency-focused
- GAAP = U.S. investor reporting, more complete
- IFRS = international, IFRS 17 effective 2023
- Same premiums, different profit figures under each
Tax Concepts
- Territorial = only domestic income taxed
- Worldwide = all income everywhere taxed
- Transfer pricing = shifting profits between subsidiaries
- Tax haven = low/no tax, attracts foreign incorporation
Key Players
- Insurers: Lloyd's, Munich Re, Swiss Re, AXA, Allianz
- Brokers: Marsh, Aon, WTW
- Bearer shares = anonymous. Registered = on record
- Repatriation = moving foreign earnings back to U.S.
Exam Trap Alerts
1. Expropriation vs. Eminent Domain
Expropriation = often NO compensation. Eminent domain = MUST compensate (U.S. constitutional requirement). Do NOT confuse these — the exam tests this distinction directly.
2. Territorial vs. Worldwide Tax
Territorial = only taxes income earned within the country. Worldwide = taxes ALL income everywhere. The U.S. now uses a modified territorial system (since 2017 tax reform).
3. SAP vs. GAAP vs. IFRS
The same insurer can look profitable under one standard and struggling under another. SAP is conservative (solvency focus), GAAP is more complete (profitability focus), IFRS is the international standard.
4. Bearer Shares vs. Registered Shares
Bearer = anonymous ownership (whoever holds the physical certificate). Registered = name on record. Bearer shares are associated with tax havens and secrecy but are now largely banned.
5. Earnings Stripping and Inversion Are Tax AVOIDANCE Strategies
These are not legitimate tax systems — they are strategies companies use to reduce tax burdens. Know the difference between the five approaches to taxation.
Quick Reference Summary
Expropriation
Government takes property, often without compensation. Political risk insurance protects against this.
Eminent Domain
Government takes property for public use but MUST pay just compensation.
SAP / GAAP / IFRS
Three accounting frameworks. Same insurer, different results under each.
Tax Haven
Low/no tax country attracting foreign incorporation. Consider: tax, privacy, stability, costs.
Transfer Price
Intercompany pricing that can shift profits to low-tax jurisdictions.
Currency Risk
Exchange rate changes create unexpected gains/losses on international policies.