Corporate multinational property insurance programmes can provide signifi cant cost and control benefi ts – but risk managers should be aware of the potential pitfalls
The trend for going global started several years ago as organisations based in the more developed regions expanded their activities. However, a big economic shift is taking place between the emerging BRIC (Brazil, Russia, India and China) countries and the more developed ones, prompting a second phase of globalisation.
FM Global operations vice-president Malcolm Davis says: “We are seeing new companies emerging in regions such as Asia, Latin America and the Middle East, which are becoming increasingly signifi cant.
They in turn are expanding into the USA and Europe, developing their operations there and in some cases looking to make acquisitions.”
It’s a trend that looks set to continue, with some commentators predicting that the economies of BRIC countries will be larger than those of the industrialised G7 countries by 2030. Wherever the push for globalisation occurs, one thing is certain: it drives the need for fl exible, far-reaching global services in which insurance buying plays a big part.
But designing and operating a multinational commercial property insurance programme is far from straightforward.
“The world is becoming a far more complicated place to do business,” Davis says. “If you are a risk manager in a big multinational corporation, there are signifi cant challenges in operating in this increasingly complex world. And the more countries your corporation goes into, the more challenges you may have to grapple with in making sure your company’s assets are protected and also endeavouring to promote and encourage risk improvement activity.”
There is an increasing realisation in the risk management community of the benefi ts in having a single programme that insures the company’s property wherever it operates.
Aon UK’s managing director, property and casualty group, Andrew Laing, says: “A major benefi t of global programmes can be cost effi ciency, with the ability to leverage a larger premium as opposed to having individual smaller covers.
“A centralised approach also gives the risk manager greater control. And there is effi ciency associated with just having to manage one premium, while the risk manager enjoys the certainty that coverage is being purchased more consistently.”
Simon Edge, a partner in JLT’s property team, agrees that a global programme gives the risk manager increased control and can often produce big cost savings. “When we are involved in setting up a global programme, we often fi nd there has been signifi cant duplication of cover. This happens because local offi ces have been buying their own policies and in many cases additionally paying fees to local brokers.
“Centralisation can often eliminate local brokers’ fees and remove duplication, which keeps down costs. The company will generally be able to obtain improved and more consistent cover worldwide.”
But while it may make economic sense for a business to expand into a country such as China, the move may raise many questions in the minds of risk managers. How can I extend our global programme to our new Chinese subsidiaries? Bearing in mind language and travel constraints, how do I communicate with managers in these new subsidiaries and talk to them about risk improvement or insurance protection?
Seeking answers to such questions can present a real hurdle, says Davis, particularly in the current economic climate. “Many risk managers in big corporations are now working alone or with smaller teams, which can make it doubly diffi cult to cope with this new landscape of extra countries and risk management challenges.”
It can also be diffi cult to secure senior management backing to implement a consistent corporate risk management philosophy across an organisation. In theory, the cost savings should present a persuasive argument at head offi ce, particularly at the moment, but will it be equally convincing for senior managers of subsidiaries around the globe? Much depends on the corporate culture, says Davis.
“In a highly centralised corporation, the culture is very much that decisions on risk management and insurance purchasing are made by head offi ce. These are then rolled out to subsidiaries around the world, which will generally adopt them with little, if any, argument.
“However, other organisations – particularly those that have grown globally by acquiring companies – may not have that complete corporate control from head offi ce because of differences in corporate and local cultures.
“Businesses with key divisions in regions remote from head offi ce may have quite senior management in place; it’s not unusual in terms of employee numbers, turnover and profi t contribution for these regional business units to generate a signifi cant proportion of the entire organisation’s result.
“In such situations, those regional senior managers may take the view that they should have a say in what happens in their regional area and may well question or even resist some elements of the policies that emerge from the corporate head offi ce. With that sort of profi le, it’s much harder for the risk manager in the head offi ce to achieve consistent outcomes with all business units worldwide.”
Aon’s Laing agrees, also citing problems with premiums and retentions. “Once you have put the global programme together, issues can arise with the allocation of costs back out to the subsidiaries. There may be problems with local divisions that believe they can buy cheaper in their local market. That may be true in some cases but overall the business would lose out on effi ciency.”
He adds: “When you are arranging a big global programme, the insurance markets are typically more competitive if the insured carries a sensibly sized retention to refl ect what is essentially a much bigger organisation. There can be issues with the local organisations that are not used to having such a large retention, but there are ways in which we can structure a retention strategy that effectively addresses both the needs of the insurers and the local organisation.”
Regional divisions may not just need convincing over central insurance buying. Davis explains: “In emerging countries such as Asia and South America, risk management philosophies and cultures are much less developed than in Europe or North America. This can present challenges for the sophisticated risk manager at head offi ce who is trying to implement a global risk management programme and pursue loss prevention strategies.
“It can be diffi cult to communicate the corporate risk management philosophy and plans to some business units around the world and persuade them that it’s in their local interests to adopt such approaches. While there’s certainly value in communicating consistent global risk management guidelines and policies, there are many benefi ts to be gained from helping employees globally understand why it makes sense to invest money in loss protection. Enterprise-wide learning can go a long way.”
Consistency and compliance
Achieving consistency around the world should be an integral benefi t of multinational programmes, whether in terms of the approach to loss prevention and risk management or insurance coverage. Yet it is not always possible to install in every country a local insurance policy that matches the corporate head offi ce model of what they would like to see in place.
This leads inevitably to what many believe is the most important issue for multinational insurance programmes – compliance.
Davis says: “Compliance is the issue that drives clients, insurance companies and brokers. Many organisations now devote substantial time and effort to making sure their insurance programme is compliant and that their assets across the globe are protected in accordance with local laws and regulations. Compliance can affect the way policies and premium invoices are issued and the currency in which premiums are invoiced – in fact, most elements surrounding the insurance contract and premium payment arrangements. Many countries have detailed regulations that set out how things should be done.”
He continues: “All parties have to get this right, including ourselves as an insurer. In some countries, there are local regulations or tariff wordings that limit insurers from putting in place exactly the cover they would prefer.
“At FM Global, we try to maximise the amount of locally admitted cover that we put in place in each country and thus minimise the amount of ‘difference in conditions’ or ‘gap’ cover included on the master policy. The aim is to make sure clients have a programme where they have a known amount of local coverage in place in each country that complies with any local regulatory rules, and that any identifi able gaps with the corporate programme specifi cation can be made up in the master policy.” In recent years, many countries’ regulators have become increasingly prescriptive in terms of how they want insurance cover to be arranged. In some cases, arranging non-admitted cover (cover provided by an insurer that is not locally licensed) for assets in certain countries is illegal. Breaching regulations can result in severe penalties and fi nes for the local division involved and could also expose its directors and officers to fi nes and penalties.
JLT’s Edge explains: “Insurers who have a locally licensed offi ce – or a partner with a locally licensed offi ce – in the territory concerned will ask that offi ce to issue the local policy. But the master policy will generally be issued to the parent organisation in the country where their head offi ce is located. Where required, a local policy will be issued to the local entity, which ensures compliance with local regulations. The master policy will generally cover differences in cover and limits. Local policies are usually issued to what is known as‘good local standards’.”
JLT property partner David Powell adds: “Another reason for having a local policy is that it can be diffi cult for the insurer writing the master policy to pay a claim to the local subsidiary without the insured incurring an additional tax liability. Where a multinational has a truly global spread, there are not many fronting insurers that are licensed to issue policies in all the territories themselves. Some partner with a number of other underwriters to provide the necessary network.”
But he warns: “The more people you have involved with issuing local paper, the more complicated it can become.”
Edge adds: “The local offi ce will often impose a minimum premium charge and may add a servicing fee, which means it is not always viable to cede to a global.”
The inclusion of difference in conditions cover in the master policy might suggest that there’s no need to worry if the local policy doesn’t match the global one too closely. But Edge points to the danger in this approach.
“In the event of a loss where the global master policy is called into play (because the local policy is restrictive in cover or limits), the local entity will be paid out by the local policy, and anything additional that’s covered by the master policy will normally be paid centrally to the parent.
Reimbursing that money to the local entity may have tax implications because it may be treated as a capital payment – or asset – coming in, rather than an insurance payment. In order to minimise the likelihood of that kind of central payment, insurers such as FM Global have endeavoured to ensure that their local policies are as close to the master policy wording as possible.”
It is possible to structure master policies so that they include payment of any additional taxes as a result of losses being compensated by the master policy.
Cost effi ciency
Cost effi ciency rates high among the benefi ts of multinational programmes. So how exactly can this be achieved?
Powell stresses that all large multinational programmes are different. “Most of the programmes we design are bespoke to suit our client’s needs.
Each programme will have a different spread of territories involved, resulting in varying levels of catastrophe exposures that will, in turn, have aggregation considerations for risk carriers.
“You also need to consider what level of loss limit the client is looking to buy or needs. Inevitably, the laws of supply and demand can have an impact.
The higher limit you have to buy, the more you need to draw in slightly more expensive capacity to complete placement.”
He also points out that it can be benefi cial to arrange a layered programme rather than using purely quota share support. “Layering can help you to generate cheaper capacity because underwriters model risk exposures differently.
When setting premiums, their models work on the basis that losses will be skewed towards the bottom of the limit of liability but not necessarily in the same proportions.
“Taking a simple example, if you take the fi rst 50% of the limit of liability, while one underwriter’s model might calculate it was worth 80% of the premium, another’s might calculate that it was worth 75%.
Similarly, for the upper 50%, one insurer might require 20% of the premium and another 25%. If you put 75% and 20% together, there is clearly a saving to the insured – assuming both underwriters are working to the same base rate.”
By their very nature, multinational policies involve insurers putting all their eggs in one basket – that of the fronting insurer. Not surprisingly, insurer security is an issue and there’s a great deal of focus on insurers’ ratings.
For risk managers, a crucial part of arranging a multinational programme is supplying high-quality data to underwriters. Laing says: “Insurers and reinsurers are reliant on good-quality data – it’s absolutely essential for cat modelling – and brokers want to make sure they present the risk in the best possible way.”
For organisations that are already centralised, providing the data is fairly straightforward because they already have it. For decentralised organisations it is much more challenging. Risk managers can call on their brokers to help here, while insurers such as FM Global, which have representatives in the various territories, can also assist. “As corporations grow and move into more countries, it becomes more diffi cult to stay on top of changes
going on around the world,” Davis says. “For example, the risk manager of a company that has taken over several companies in a fairly short time may have great diffi culty in getting information about their global locations, asset values and so on. Our local service personnel around the world can help get that information and report it back to the risk manager in the home country.”
He stresses that even companies of a similar size with an equal number of subsidiaries in the same regions may have very different servicing needs. “In some cases, we are asked to visit each of a client’s local subsidiaries around the world, explain the new insurance policy, describe how the programme is designed to work and get feedback for the risk manager. In other cases, we manage the issuance and distribution of policy documentation but do not make face-to-face visits to local subsidiaries.”
Clients may also need assistance with risk improvement at their local facilities. FM Global’s approach is to have a consistently trained team of local loss prevention engineers around the world who know the languages and the cultures of the countries where they work. “They visit a client’s local facilities, help them understand the property risks they may have, and recommend appropriate risk improvements,” Davis says.
Powell says there can be a number of advantages to a multinational company using a captive insurance company to retain some of the risk. Specialist advice can be provided to ensure such a solution is properly tailored to the insured’s unique circumstances.
One obvious advantage would be the insured group’s retention of part of their overall premium spend, especially where the premium being quoted at the primary level has been infl ated by (re)insurers due to a recent run of losses.
“When participating on a primary basis, the captive will normally need to be fronted because it is unlikely to be a licensed insurer in the territories where the primary paper needs to be issued,” he says.
“This generally has credit implications because the fronting company will want to be confi dent that they will be reimbursed for any claims they pay out on behalf of the captive. Letters of credit or a parental guarantee are often therefore required.”
The applicable jurisdiction for policy disputes is another area for consideration when designing the programme, says Edge. While the master policy is usually subject to the law of the parent company’s home country, any local policies will be subject to local jurisdiction. If there is a confl ict between the local policy and the global master, where the fronting company and the local policy issuing company are part of the same group a problem should not arise.”
However, it’s important to ensure that the reinsurance cover is subject to the same law and jurisdiction for dispute resolution as the master policy, he adds. “Otherwise there is potential for disputes to be held in more than one jurisdiction and under confl icting laws, which could result in different outcomes for the fronting policy and the reinsurance contracts.”
With a programme encompassing many client locations in a large number of countries, managing premium fl ow is an important consideration. “Many of our bigger clients have their own captive insurer," David says. “We’re often asked to lead their global programme, issue local policies and collect premiums from countries around the world.
“We then share an agreed amount of the risk and premium with the captive. We therefore need to manage the entire premium fl ow from the front to the back end, and we need to work quickly to get policies and premium invoices issued in the various countries, collect premiums and then pay the agreed share to the captive.
“Obviously, the captive wants its money as quickly as possible after the policy inception or renewal date. We are often able to achieve payment to the captive within 30 and 45 days after the renewal date.”
Global commercial property programmes can offer signifi cant advantages to companies but clearly there’s a lot to consider when designing and arranging them. Davis concludes: “As a mutual organisation, FM Global has always focused on service delivery to clients. As more of our clients opt for multinational property programmes, we have extended that principle worldwide – to help clients navigate the challenges of
going global.” ¦