Managing multinational insurance programs

Managing multinational insurance programs

In a globalized economy linked by overnight delivery, advanced telecommunications and the Internet, even small companies increasingly do business with foreign suppliers and customers. Conducting business outside one s home country has never been easier, but doing so leads to a wide array of risk management and insurance issues. Companies with foreign subsidiaries, branches or joint ventures especially need to be aware of their exposure to loss in the various countries in which they do business. They need to be certain that their insurance programs are appropriate to the exposures and in compliance with local regulations. Failure to do so may leave a company without insurance coverage which may not become apparent until after a loss has occurred and potentially subject to fines and penalties. Managing a multinational insurance program can be enormously complicated. Some countries require policies to be purchased locally, meaning that the buyer needs access to distant insurance markets and must be able to manage language issues, especially since the policies are often issued in the local language. One solution is to delegate local insurance purchases to local employees, but this can lead to other issues concerning the quality and consistency of coverages. Companies doing business outside their home countries can materially simplify the process by working with brokers experienced in international insurance programs and multinational insurers that can provide substantially one-stop service, even when local insurance policies are required. Companies with foreign subsidiaries, branches or joint ventures especially need to be aware of their exposure to loss in the various countries in which they do business. Risk management and insurance issues of multinational businesses Almost every company with a website is potentially exposed to liability from foreign sources. Even if it does little or no business in a foreign country, since the Internet is borderless, the company could potentially run afoul of various libel, intellectual property infringement and privacy laws. Companies that sell products to foreign buyers have even more opportunities to incur liability, such as product liability lawsuits and enforcement of consumer protection laws. Companies with physical locations outside their home country face the full range of property and liability exposures in each country in which they have facilities and people. Understanding the exposures presented by each country in which a company operates can be daunting. Liability exposures are especially challenging since laws and legal systems vary widely. Reforms in many parts of the world are providing consumers, employees and investors with greater access to the courts, leading to increasing exposure to lawsuits. Foreign companies may be especially exposed to suits due to a lack of awareness of, or sensitivity to, local laws, customs and practices. Foreign companies also may become the targets of enforcement actions from regulators and law enforcement agencies. Companies with only minimal foreign involvement may be able to adequately insure their foreign exposures with a single policy providing worldwide coverage. However, that almost certainly is not the right answer if foreign subsidiaries, branch offices and manufacturing facilities are to be insured. In many countries, local admitted insurance policies are necessary. Often, admitted policies are required by law. If a claim occurs in a country requiring an admitted policy and the company has only a global non-admitted policy, the foreign operating entity may be barred from receiving recoveries from the non-admitted policy. Additionally, companies may face regulatory actions for failure to maintain compulsory admitted insurance or for buying insurance from a carrier not licensed in the country. 2

Even if not required by law, local policies may be a good idea in many cases. Local policies are more likely to be tailored to local laws and practices, and ready access to local claims personnel may be essential following a loss. Additionally, buying local policies may avoid certain complex tax issues associated with multinational policies. Companies may be able to stitch together an insurance program comprised entirely of policies purchased in each country in which they have operations. Under this option, policies are purchased from local carriers according to local custom and regulation, and premiums and losses are paid in local currency. Companies may delegate insurance purchases to local offices to ease access to the local insurance market and to more effectively manage language and business customs issues. Local employees, however, may have little expertise in insurance matters. Additionally, a patchwork of local policies is likely to result in uneven coverage that may fail to meet corporate risk management standards, and may result in unintended shortfalls and gaps in protection. Companies also may be compelled to rely on local insurers that do not meet minimum corporate standards of financial strength and security. The controlled master insurance program alternative To assure complete and uniform coverage wherever they do business abroad, many companies opt for a combination of a policy providing worldwide coverage outside their home country and local policies what is known as a controlled master program. Under this approach, local admitted policies are supplemented by a difference in conditions (DIC) / difference in limits (DIL) policy purchased by the corporate risk management department. The DIC/DIL policy is designed to sit above the local policy, providing additional limits of liability if coverage under the local policy is insufficient. It also will fill coverage gaps in local policies or when a combination of local policies fails to fully address an exposure. Where no local policies exist, the DIC/DIL policy provides primary coverage. Under most scenarios, premiums and losses are paid in the countries where the exposures are located through the local policies. The DIC/DIL policy should rarely come into play, but it is available if shortfalls or gaps occur. A controlled master program purchased from a large multinational insurer provides a number of administrative benefits in addition to the coverage benefits. The DIC/DIL policy and the local policies essentially can be purchased as a package, eliminating the need to buy coverage locally on a country-by-country basis. The multinational insurance company typically is responsible for staying abreast of local insurance requirements and for assuring that the program fulfills the requirements of each country in which coverage is provided. The insurer typically handles the premium allocation and payment. Additionally, while local claims adjusters may be employed, claims can be coordinated centrally. 3

Other exposures of companies doing business abroad While coverage may vary by insurer, controlled master programs for larger companies typically cover property/business interruption and general liability including auto and employer s liability. A controlled master program addresses many of the exposures of companies with foreign operations, but many companies face the following risks that typically are not addressed by this package of coverages: Companies with larger fleets may want to purchase a motor program inclusive of mandatory local auto liability policies. Companies with foreign subsidiaries may need local directors & officers (D&O) insurance coverage. Similar to a controlled master program, multinational D&O programs also may be structured as a master DIC/DIL policy in tandem with local policies. Companies with assets in politically unstable regions should consider political risk insurance. Coverage typically is available for exposures such as governmental expropriation or confiscation of assets, governmental frustration or repudiation of contracts, and inconvertibility of foreign currency or the inability to repatriate funds. Companies that ship goods may need marine cargo protection. Companies that provide professional services to foreign clients may need specialized errors & omissions (E&O) policies. Local environmental liability insurance may be necessary, especially for manufacturers, contractors or companies that transport hazardous materials. Companies with employees who travel to dangerous countries may want to purchase kidnap and ransom coverage. Foreign Voluntary Workers Compensation can be purchased for employees that work and travel abroad. For smaller companies, some of these coverages may be available as a package bundled with the controlled master program. 4

Putting together the optimal insurance program for foreign exposures Today, a number of large insurers claim to be able to provide nearly worldwide coverage through controller master programs. In fact, only a few insurance companies - including Zurich - have the knowledge, experience and resources to effectively manage the complexities of multinational insurance programs. The first step in developing a successful multinational insurance program is to find a broker experienced with multinational clients and who knows the relative strengths and weaknesses of the insurance groups offering controlled master programs and other types of foreign coverages. Since multinational insurance programs can be very complex, and may need to be carefully tailored to a company s specific exposures on a country-by-country basis, changing insurers can be time-consuming and expensive, and can lead to inconsistencies and gaps in coverage. For that reason, companies and their brokers should carefully select an insurer that is a good prospect as a long-term partner. Some qualities to look for include the following: Long-term experience with multinational insurance programs. Ability to provide coverage and service not only in the countries in which the insured operates today, but in every country in which the insured is likely to do business in the future. Demonstrable knowledge of local market requirements, and an infrastructure to keep that knowledge up to date. Experience with other companies in the insured s business sector. Good value in coverage and price, though rarely the lowest cost provider. Stability and financial security. Globalization is a business and economic reality, but insurance still is regulated locally. A well-structured multinational insurance program with a top-tier global insurance company can minimize the friction caused by the crazy quilt of insurance regulation around the world, and allow management to focus on growth and profitability without liability and insurance issues being an impediment. Want more articles like this? Sign up for Distinctive Risk Insights. You ll receive periodic emails from Zurich Canada that provide direct access to whitepapers, risk management tools, webinars and instructive videos that address timely risk-related business issues. www.zurichcanada.com/distinctive-risk-insights Zurich www.zurichcanada.com 416-586-3000 The Zurich logo and Zurich are trademarks of Zurich Insurance Company Ltd Zurich Insurance Company Ltd (Canadian Branch) This is intended as a general description of certain types of insurance and services available to qualified customers through Zurich Insurance Company Ltd in Canada. Your policy is the contract that specifically and fully describes your coverage. The description of the policy provisions contained herein gives a broad overview of coverage and does not revise or amend the policy. 2015 Zurich Insurance Company Ltd A1-112004936-A (03/15) 112004936