Financial interest clause
A master policy clause that indemnifies the parent company for a loss suffered by a foreign subsidiary, where local law forbids indemnifying that subsidiary directly from abroad.
In an international program, some countries prohibit an insurer not licensed locally from indemnifying a business located on their territory. The master policy therefore cannot directly pay the subsidiary for the part of the loss the local policy does not cover. The financial interest clause gets around this obstacle by changing the beneficiary and the subject matter: it indemnifies the parent company, insured under the master policy in its own country, for the financial loss the subsidiary's claim causes it as a shareholder. The insurable interest is no longer the property destroyed abroad but the value of the parent's holding. The structure assumes the parent has a real, measurable interest, and it raises questions the underwriter must anticipate. The calculation of the financial interest loss does not always match the cost of local repair. Subsequent transfer of funds to the subsidiary may fall under exchange controls, tax or other restrictions. And some regulators dispute that the clause respects the spirit of their licensing rules, making it a compliance instrument to be handled with care.
Textbook case: a European group's Chinese plant suffers a 30 million euro fire, of which the local policy covers only 10 million. Local law prohibiting direct indemnity by the European insurer, the master policy pays 20 million to the parent company for its loss of financial interest; the group then refinances its subsidiary through a capital injection.
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