Diversify Globally, Think Locally

The financial turmoil of the past few months has had a huge impact on the global economy. This time, the turmoil was a byproduct of the debt crisis that spread from Greece to Ireland to Portugal. The International Monetary Fund agreed to a $156-billion loan for Greece in May 2010, conditional upon the implementation of harsh austerity measures. This was followed by a $120-billion bailout for Ireland last November and a $110-billion loan package for Portugal in May. Spain and Italy are now under pressure to meet their debt obligations.

About $8.2 trillion was wiped off the value of global equity markets from July 22 through Aug. 19, as Europe’s debt crisis deepened and investors speculated that an equally debt-laden U.S. economy could slip into a “double-dip” recession. Heading into the coming months, if not years, we are facing a prolonged period of uncertainty, sluggish growth and volatility in stock markets.

Ironically, this economic turbulence has not hampered businesses from pursuing global diversification. In fact, one cornerstone of international trade is the ability to spread risk from region to region, diminishing the overall impact of market downturns in areas such as Europe and the United States. The Economist Intelligence Unit has forecast world trade growth to rebound to 7.7% in 2011 – a far cry from the -11.7% experienced in 2009 at the height of the recession.

Diversification of Risks

Globalization faces constant challenges and occasional setbacks, but the overall trend to more diverse international trade continues. The strength of emerging markets in Brazil, India, China and many Association of Southeast Asian Nations (ASEAN) countries represents an important shift in trade patterns for industrialized countries. Unlike many of the developed nations, emerging markets have enjoyed several years of trade-led prosperity, trade surpluses and accumulating foreign exchange reserves.

Today, the United States, China and the United Kingdom are the three main destinations for Canada’s exports, according to Statistics Canada. Although the value of Canada’s exports to all three countries increased over the past decade, the share of exports to the United States fell. During the same period, the other two countries’ share tripled, with China recently becoming our second-largest trading partner. It’s clear that many Canadian firms are eager to expand beyond North America.

For brokers, these clients face a world of risk when it comes to property and liability exposures. But many don’t realize the varied and often intricate compliance and insurance regulations that exist in local jurisdictions. In fact, rules continue to change in critical areas such as admitted versus non-admitted insurance, domestic reinsurance branch obligations, tax exposures and premium payments. Common obstacles need to be identified and addressed with the help of an informed, trusted insurance partner.

Localizing the Global

As the scope of international trade widens, so too does the number of insurable risks in new jurisdictions, each with their own unique local requirements. Regulators in those countries are responding, often with more stringent insurance rules for foreign-based companies. With the increase in global trade, governments are closely monitoring their insurance laws and invoking protectionist measures to either capture revenue or exert more control over local transactions.

For example, Argentina announced new rules effective Sept. 1 requiring foreign reinsurers to open an Argentine branch or otherwise be barred from transacting business. Under the new regulations, local insurers will be prohibited from ceding risks to any reinsurer that has not made itself subject to Argentina’s regulatory authority (Resolution 35.615/2011). Members of the insurance community have pointed out that more than 90% of risks in the Argentine market are now reinsured abroad, leaving the domestic market with limited capacity to meet this increased requirement. Another concern is that more South American countries will adopt Argentina’s position on local reinsurance branches.

In other instances, regulators are carefully scrutinizing insurance transactions and activities, particularly regarding non-admitted insurance (coverage of a risk located in a country where the insurer is not licensed). Whereas many jurisdictions such as Canada, the United Kingdom and Australia permit local residents to purchase insurance from foreign-based insurers (under certain rules), other countries like Argentina, Brazil, China, France, India, Italy and Mexico do not allow residents to buy coverage from a non-admitted carrier. Penalties for infractions can be harsh.

In Mexico, a prohibition on entering into an insurance contract with an unauthorized foreign insurer constitutes a criminal offence, with the potential for substantial fines and imprisonment of up to 10 years.

In China, Canada’s second-largest trading partner, local regulators often require payment of premium before coverage is provided, known as “cash before cover.” Depending on the province or municipality, the Chinese Insurance Regulatory Commission (CIRC) may require that a policy cannot be incepted until the insurer receives the premium payment. CIRC is also more heavily policing legislation for foreign-based insurers and may decide to inspect the local broker’s office to audit files for reference to non-admitted policies. Chinese tax audits can be very rigorous; any large non-admitted claim payment could become liable to local tax regimes.

More countries are clamping down on non-admitted insurance, with stringent fines and penalties  – often up to $100,000 or a multiple of premium – and even license suspensions. One recent example of regulatory enforcement occurred in Switzerland. An insurance broker there purchased a statutory professional indemnity from a non-admitted foreign insurer. The Swiss Federal Office of Private Insurance considered the contract void and denied the broker’s licence due to the violation.

Brokers and their clients must be cognizant that insurance rules and regulations vary greatly from jurisdiction to jurisdiction. Fines and penalties for non-compliance can be costly and damaging for insureds, brokers and insurers. The Canadian insurance market has no choice but to increase awareness of compliance issues around the globe to properly protect clients. This underlines the importance of having the right kind of knowledge, programs and partners in place.

Mitigating Risks of Global Insurance

For most global insurance programs, there is no one perfect solution. Coverage options must be tailored to the risks that an individual company encounters in the markets in which it chooses to do business. However, brokers should actively look for key elements in a truly international insurance package policy.

The first is that a DIC/DIL (difference in conditions/difference in limits) policy should be able to cover the gaps created through local coverage requirements. A global insurance solution should allow claims to be brought and settled anywhere in the world. It should also provide a policy in each of the countries in the language and customs of that country, supported by an English language master policy.

The level of knowledge and experience of the insurance carrier is one intangible factor in choosing the right market for international clients. How often does the company provide updated intelligence on changing foreign market conditions? What is the global reach of the insurer? Does it provide coverage in 130 countries around the world, with access to local underwriting expertise? Does a master global insurance policy accommodate any existing gaps in coverage due to local policy language and nuances? Prudent brokers should expect solid and immediate answers to these questions for their expanding global clientele.

The key issue is knowledge. Armed with sound insurance advice, a solid insur
ance partner and keen awareness of local market conditions, brokers should be confident in helping their clients achieve success on the global stage.