Going Global

Companies are selling their goods and services across the globe, investing in their own production facilities in various places and forming new kinds of partnerships with suppliers, producers, distributors and innovators located around the world. Although the opportunities for businesses to grow globally continue to arise, there are still many challenges in assuring that global growth remains profitable growth. Cultural differences, currency issues, accounting standards and, of course, regulatory and jurisdictional differences all pose challenges; for risk managers, they can prompt liability concerns and insurance questions.

Just as there is no universal language, there is no universal consensus around how to define insurance terms. Each country has its own local standards and insurers comply with these insurance rules and regulations. This has typically meant that coverage provided by each policy, part of a global insurance program, could vary widely from country to country and from insurance company to insurance company. For risk managers, trying to coordinate these diverse insurance contracts can create an administratively burdensome task.

This is why many corporate risk managers have aligned with global insurance brokers and insurers to establish global partnerships to create effective and efficient global insurance programs.

An effective global program requires the ability to think globally and act locally. A global program structure can also help with policy issuance, premium collection, currency management and the tracking of payments to the various parties involved.

In the simplest solution, a broker will approach one carrier with a global network to provide 100% capacity, issue local policies and coordinate invoicing, premium payment and local claims servicing with the local broker representative and the client’s local subsidiaries. Typically, global insurance programs are built around a master policy issued in the territory of the insured’s parent company. This is supported by multiple policies in local countries to cover local exposures and ensure regulatory and premium tax compliance. The insurer would issue a master policy that would provide the broadest coverage available to the program; it would be the primary policy to respond to any locations situated domestically and furnish excess coverages where permissible over the local policies.

A number of global extensions can be applied to the master policy to enhance the breadth of the global insurance program coverages, including:

Increased tax liability

If the insurer has to pay a loss in a country other than where the loss occurred, this clause provides for the adjustment of the loss to reflect the possible differences in tax rates between the two countries.

Tax treatment of profits

If the tax rate on a business interruption claim is higher than the tax rate on what the earnings would have been had no loss occurred, then the coverage will adjust the loss payment accordingly.

Coinsurance deficiency

This clause reimburses the insured for any coinsurance penalty incurred under the local admitted policy.

Currency devaluation

This clause covers the deficiency in the amount of loss payable under the local admitted policy solely as the result of the official government devaluation of the currency in which the admitted policy is written.

Difference in conditions/limits

This coverage wraps around any locally admitted policy when the coverage in the master policy is broader in terms of coverage or limits.

For international property programs, DIC/DIL coverage generally provides insurance on a broader perils basis than policies available locally. For example, when a business purchases property insurance locally to cover one of its international sites, the local subsidiary may have insured the building for $10 million in coverage for a building that at the time of the loss is determined to be worth $15 million. In the event of a total loss, the local insurer would pay its policy limit of $10 million. A DIC/DIL policy may then cover the additional $5 million not covered by the local contract.

For some large multinational companies, their global insurance programs require significant limits and one insurer may not be enough. They may require a panel of insurance and/or reinsurance companies to provide the capacity required to complete the placement of their insurance program.

Another important aspect of a global insurance program is the fronting of the local policies. Most global program insurers have their own network of owned offices around the world. But for those countries where they do not have their own operations, they will make an agreement with well-known local insurance companies to issue a policy on their behalf as part of the client’s global insurance program. The fronting insurer will often require participation on the risk situated in their country; this can add quite a bit of complexity to what might have seemed to be a relatively simple notion — especially when more than one carrier participates in a quota share program. The global program obstacle course that many large international companies are required to maneuver requires training and cooperation. However, the risk manager does not have to run this course unaided. Global insurers and brokers that have focused on building the networks provide the compliance assistance and resources necessary to service the multinational client’s global insurance requirements.

In fact, the placement of a global insurance program requires local service with access to a global network that includes strong underwriting capabilities and expertise in the various insurance jurisdictions. Additionally, risk engineering and loss prevention capabilities as well as effective claims management are required and should be maintained on a single global platform, including the delivery of management information. For instance, a global risk engineering team using on-the-ground engineering expertise in any given location will be more familiar with local building codes, fire prevention codes and standards. Likewise, the claims management process for global programs relies on the skill of claims adjusters in their local market to service claims on a global basis. In some cases, this may mean recovering losses from a terrorism pool or other government fund.

Despite these challenges and the departure of several carriers from the global program market, qualified international insurers can work with these international clients to create a coordinated, centralized global insurance and risk management program. Building an effective and efficient global insurance program is challenging, requiring a commitment of resources from the client, broker and insurer to deliver and service a program successfully.

Many factors drive the global insurance industry’s’ ability to serve multinational clients’ needs effectively. They include:

Knowledge, time and financial commitment

Knowledge, time and financial commitment are required to establish and maintain a licensed global network of offices and fronting partners that can successfully handle local relationships with clients, brokers, claims adjusters, regulatory bodies, work councils and tax authorities. In addition, given the vast range of regulatory, business and cultural standards, the management of the collaborative spirit is required.

Financial strength and adequate credit risk management

Credit risk arising from fronting for companies that are unlicensed insurers in many countries may place significant financial demands on global insurers. In order to meet global fronting needs, it is important that lead insurers are fairly compensated for the cost of both their global network services and these potential credit exposure issues. This process carries credit and liquidity risk that may require additional capital to satisfy rating agenc
y requirements.

One single, consolidated financial reporting system

Since statutory accounting principles vary significantly from country to country, global insurers have to harmonize different statutory practices in one system.

Sophisticated technology

Global programs also rely heavily on sophisticated information technology and management information systems to properly address and report on policy issuance, premium payment, claims handling and administration. The delivery of management information to clients and brokers is key to an effective and efficient global insurance program. Consistent and timely delivery of program data enables the risk manager to manage his/her management’s need for status updates regarding many issues affecting the integrity of their global program anywhere in the world. Clients, brokers and insurers have worked hard to create IT platforms capable of sharing this information through Web-based applications. Online reporting on policy issuance, premium payment, captive cessions, claims notifications and payment status, among other things, is now one of the more important aspects of a successful global insurance program. This requires an integrated global IT platform with accurate data that can be sliced and diced to meet clients’ information needs.

The demand for compliant global insurance programs is growing due to so many corporations operating in most major industrialized countries, in addition to many of the emerging market territories. The few insurers able to respond to these evolving needs must also deal with helping these clients secure coverage in countries that have traditionally been closed to outsiders or closely regulated by the government. These markets have begun to move towards a more open approach, but it is important to recognize the potential impact on a global insurance program placement. This is just one example of why it is critical for clients, brokers and insurers to keep abreast of developments in these emerging markets to avoid any surprises in time of need. In those countries where insurance markets are now opening to broader competition, many international insurers have made great strides in establishing their own operations to better serve their international clients.

A successful global insurance program is a partnership between the client, the broker and the insurer. An open exchange of knowledge and experience with the objective of protecting a corporation’s assets wherever they may be on the planet must be the underlying motivation of this partnership. The delivery of an integrated global insurance program relies on the ability to share in real time risk management, policy issuance, premium payment and claims information. The ability of a global insurer to deliver this service and support with excellence is a critical differentiator.

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In the simplest solution, a broker will approach one carrier with a global network to provide 100% capacity, issue local policies and coordinate invoicing, premium payment and local claims servicing with the local broker representative and the client’s local subsidiaries.

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Global programs rely heavily on sophisticated information technology and management systems to properly address and report on policy issuance, premium payment, claims handling and administration.