The term "foreign insurer" is often used to describe an insurance company operating in a nation in which its headquarters or principal business locations are not based. In the United States, the term is also used to describe insurance firms that are based or domiciled in one state but that sell insurance policies to consumer and business clients located in other states. Insurees who purchase policies from foreign insurers are not always afforded the same legal protections as policy holders who buy insurance policies from domestic insurers.
A foreign insurer may sell life insurance, homeowners insurance, health insurance and a variety of other types of policies. Many nations have laws in place that are designed to protect the interests of insurance policy holders. Laws in some nations require insurance firms to keep a certain amount of funds in highly liquid investments so as to ensure that the firm has enough readily available capital to cover anticipated insurance claims. Additionally, insurance firms usually have to register with the national or regional authorities before beginning to market insurance products within a particular country or region. Regulators in most countries have the authority to audit both domestic and foreign insurers.
If an insurance firm proves unwilling or unable to make a payout, the domestic regulators often have the ability to fine the firm, assess various types of penalties or even to seize it and liquidate its assets. When a foreign insurer fails to honor a policy, the domestic regulators can normally only take measures against the subsidiary or division of the firm that operates within that regulator's area of jurisdiction. The regulators cannot seize assets that the insurance firm owns in its place of domicile. Therefore, regulators can more easily take action against a domestic than a foreign insurer.
While a foreign insurer may expose an insuree to higher levels of risk than a domestic insurer, an insurance firm may also have to suffer the adverse consequences of operating in a domestic market. Political changes within a particular nation could lead to certain types of policies being outlawed or becoming obsolete. If a nation introduced a national healthcare program then foreign insurers operating in that market may lose a significant amount of money since people would no longer need to buy private health insurance. Within its place of domicile, an insurer can more easily use political pressure and financial campaign contributions to influence policy makers than it can in a foreign market.
In the United States, for example, insurance laws are set at the state level. Laws and regulations may vary between states and a company cannot market products unless it is registered to operate in a particular state. To avoid confusion between American insurers and insurance firms from overseas, regulators in the United States refer to out of state insurers as foreign while insurers from other nations are referred to as being alien insurers.