Cambodia’s little-understood insurance rules mean that only domestic coverage is legal

IN a developing country such as Cambodia, it's easy to assume that the only way to secure adequate insurance is to go offshore.

The insurance market here is small and made up of five largely indigenous players who cater to the needs of clients ranging from consumers to NGOs and corporates. The popular belief is that they do not have daily exposure to sophisticated risk-financing methods and techniques, so their ability to deliver world-class insurance products is limited.

There is also a widely held misperception that insuring offshore is a commonplace and legal practice.

Both beliefs and practices are unnecessary, incorrect and carry onerous penalty ramifications.

Firstly, it is illegal to insure directly offshore. Article 8 of the Cambodian insurance law states clearly that anything insured in Cambodia must be insured onshore with a licensed insurance company.

This holds regardless of the risk, sum insured or any other factors. In short, if the risk is insurable, then it must be insured here in Cambodia.

Secondly, if a company does decide to break the law and seek insurance offshore, its premium payments come with withholding tax obligations.

Article 26(c) of the tax law states that "payments to a non-resident taxpayer shall withhold and pay as tax, an amount equal to 14 percent of the amount paid". This applies to "technical services", which include insurance.

Finally, by insuring domestically, a company will shift that insurance tax burden to the insurer, who will pay 5 percent of the premium in tax under Article 21 of the tax law.

The idea that the local market lacks international-level skills and knowledge is one oft-cited reason for looking to an offshore provider. While the local market may be small, it satisfies the needs of the most demanding buyers for all kinds of complex insurance issues. And when it comes to claims, customers benefit from services that understand the local conditions, practices and resources.

This fact is vital when it comes to recovering from a loss.

Where local insurers encounter capacity constraints on a particular risk, solutions are regularly found via international reinsurance and other avenues. Ultimately the local insurer is responsible to deliver on its promises.

Examples of regular offshore insurance purchases that contravene insurance and tax laws include expatriate health, property, liability, professional indemnity, directors and officers, marine and aviation insurance.

By insuring offshore, companies in Cambodia are unwittingly exposing themselves to a new class of risk - government prosecution. Cambodia's tax department is increasingly pursuing tax revenue through compliance enforcement, and withholding tax on offshore insurance premiums is very much in its sights.

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David Carter is the CEO of Infinity Insurance, a member of the Royal Group. He can be contacted at [email protected].