09/06/2010 Author: Tony Griffiths

Insurers reluctant to cover Fin 48 risk

Hedge funds seeking cover against the potential fallout from Fin 48, the recently-introduced US Gaap tax provision, are receiving a lukewarm response from the insurance market, with underwriters reluctant to back multiple policies.

Fin 48 requires affected funds to register all taxes as yet unclaimed by the countries in which they  trade. The likelihood of each tax having to be paid is then reflected in a fund’s Net Asset Value (Nav), potentially reducing its value, and sending funds scrambling for coverage. A number of jurisdictions have problematic tax structures, with funds trading in Spain and Australia facing particular scrutiny.

“Having taken advice from top-tier law firms in Spain and Australia, our opinion is that the chance of tax being payable is in the region of 50/50,” said Guy Williams, regional manager Europe, UK & Ireland, M&A insurance at Chartis.

According to Williams, he and his team have “not yet seen any such risk that we would be comfortable to insure”.
Fin 48 only considers the outcome of a theoretical attempt to collect a tax, not whether a tax authority would make an attempt in the first place – thus increasing the risk of liability.

HFMWeek is aware of one underwriter, Zurich, that has agreed to take on a Fin 48-related policy covering a hedge fund, but it is apparently reluctant to add a second.

 “There is a big appetite for any sort of risk transfer mechanism regarding Fin 48, and insurance has been put in place,” said Brian Hendry, an executive director at insurance broker Willis. “Underwriters, however, are going to be selective over what risk they consider, the terms they propose, and there will be a limited capacity in the market.”