In the first of a two-part article looking at the considerations when designing a multinational insurance programme, Mr David Halperin of AIG discusses the merits of a local policy as part of a Controlled Master Program to prevent instances where a multinational could be left without coverage for certain losses in a particular jurisdiction.
Weighing worldwide insurance options
Much has been said and written about the complexities of multinational insurance programmes. For those of us who occupy the multinational space — insureds, carriers and brokers alike — terms such as “compliance”, “compulsory”, “admitted”, and “non-admitted” are bandied about regularly. But what do these terms really mean, and do they mean the same thing for each stakeholder? More importantly, do these terms actually help us collaboratively structure multinational insurance programmes?
The expansion of regulatory regimes governing everything from financial services and taxation, to general business activities and corporate governance — against the backdrop of interconnected world and regional economies — requires a thorough assessment of cross-border risks as well as the options and obstacles inherent in multinational insurance programmes.
There is no one right way to structure a programme. Rather, each programme should reflect a particular multinational’s preferences, goal and situation, and be adaptable, year to year, as the organisation’s needs change and the global business climate inevitably evolves.
The building blocks: Local policies, global policies, Controlled Master Programs (CMPs)
A multinational has several options for insuring risks around the globe.
• It may utilise separate, unrelated local insurance policies in each country where it has exposure. These policies are underwritten by carriers licensed in the particular countries to insure the multinational’s local offices, operations, subsidiaries, affiliates, assets and/or people. Locally issued policies are tailored to local industry practices and regulatory requirements, provide access to local reinsurance pools, fulfil local contractual obligations, and afford a vehicle for local claim servicing and local payment of claims, premiums and premium taxes.
• A multinational may rely on a single global insurance policy issued in its home country to cover itself and its worldwide exposures. Global policies are generally issued within the multinational’s home country by a carrier licensed only in that country. These policies enable the multinational to assess its risks and insurance needs centrally, and provide consistent terms, conditions, limits and umbrella attachment points for the organisation’s operations worldwide.
• Both local and global policies offer advantages. Fortunately, multinationals do not have to choose one or the other, but rather may combine the best of both in what is commonly referred to as a CMP, which essentially combines multiple local policies issued in various countries with a global policy in the multinational’s home country.
The global policy is often a “difference in conditions/difference in limits” policy, meaning it serves as a backstop for all of the local policies, providing coverage if a claim is either not covered under a local policy or the local policy limit is exhausted (subject to the global policy’s terms, conditions and remaining limits).
Because the global policy usually has a worldwide coverage territory, it also covers risks even in countries where there are no local policies. In a CMP the global policy and local policies are linked, often through terms in the global policy. Properly structured, a CMP can provide a multinational and its worldwide operations with the benefits of both local and global insurance protection.
Coverage
A global policy for local risks
Without a local policy in place, a multinational could be left without coverage for certain losses.
An example: An organisation faces a potential directors and officers (D&O) lawsuit in Europe. All of its D&O exposures worldwide were insured under a single global policy, which was issued on a non-European D&O coverage form. The potential losses from this oncoming lawsuit may not be adequately covered under the global policy because the facts giving rise to the legal action are particular to European companies, and not expressly contemplated in the non-European form. The standard D&O form in Europe would have covered this potential lawsuit.
Evaluating the risks
The greater the exposures, the greater the need for local insurance protection
The fundamental question facing every multinational is whether or not to utilise a local insurance policy in a given country for a particular line of business, either on a stand-alone basis or as part of a CMP. While posed as a yes or no question, the complexities in answering it are multi-faceted, and involve the same analytical skills, judgment and risk assessment that risk managers deploy on a daily basis.
The more significant the risks, the greater the need for local insurance protection. A multinational should undertake a comprehensive risk assessment annually to determine whether a local policy is prudent in a given country for a given line of business.
A thorough evaluation should encompass the multinational’s products and services, physical presence, corporate structure/capital position, lines of insurance and contractual counterparties.
Ultimately, the risk manager must consider the local assets, exposures and individuals at risk.
Products and services
Whether or not a risk manager wants a local policy in a given country may depend on the products and services its operation provides in that country. If the local operation manufactures an inherently volatile or dangerous product, the risk may be heightened and a local policy may be wise. A consumer-oriented product or a high profile product that attracts media attention also indicates higher risk and is more likely to merit a local policy.
The risk manager should also review if and how products or services are regulated, what regulatory bodies are involved and whether prior approval is a prerequisite for conducting business. Lastly, the types of claims and allegations that have historically arisen in connection with the local operation are a key consideration.
Physical presence
The nature and size of the local operation has bearing on programme structure. For example, does the multinational have only a small in-country sales office, or does it have a large factory or an extensive auto fleet on the ground, which heightens exposure? Whether the local subsidiary rents space or owns real property could implicate different liability considerations, and may also be important in assessing the risk.
Company structure/Capital position
A subsidiary’s legal structure and local capital position could portend whether a local policy is warranted. Different types of liabilities and considerations come into play depending on whether the parent company has a locally incorporated subsidiary or a locally authorised branch. When it is the latter, the risk manager may be especially reluctant to expose the parent company to the foreign risks of not having a local policy.
How the local subsidiary or branch is capitalised and what tax liabilities may be incurred if a claim payment were received from the parent company could be factors. A strong capital position may afford the local subsidiary the flexibility to forgo a contribution from the parent. Conversely, a weak capital position could jeopardise the solvency of the local operation, necessitating capital from the parent and possibly triggering significant tax liability.
Lines of insurance
The type of insurance is another determinant. If the line of insurance is compulsory, such as auto insurance, the decision to buy local is easy. However, most lines are not compulsory, in which case the decision may be swayed by whether the line is third-party liability or first-party, and/or whether it is a high frequency or high severity line.
Moreover, if crucial terms and conditions are available only in the local marketplace, purchasing a local policy will be particularly important.
Contractual counterparties
Whether or not a local policy would be advantageous (or necessary) could also depend on local contracts and contractual counterparties. If the local counterparty is a private sector company and the contractual obligations are innocuous, the risk of not having local insurance may be minimal. However, if the contract is with a local government entity that imposes obligations to carry insurance from a locally licensed carrier, the need to purchase local may be clear.
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Highlights
• There is no one right way to structure a programme, but rather each programme should reflect a particular multinational’s preferences and goals;
• The global policy often acts as a backstop for all of the local policies, providing coverage if a claim is either not covered under a local policy or the local policy limit is exhausted.
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Mr David Halperin is Deputy General Counsel, Global Commercial Insurance, AIG. Part 2 of this article will appear in the November issue of MEIR.