Managing a Global Insurance Program

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New Jersey RIMSJanuary 14, 2014

Tracey EstesRegional Underwriting Manager

AIG WorldSource

Bruce WinemanSr. Managing Director

Aon Risk Solutions

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Agenda Introduction What is the big deal about International? Considerations - 5 key concepts Comparing insurance environment in China and

United Kingdom What can go wrong? Emerging trends Framework and tools for making decisions

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Introduction Under the best of circumstances, arranging a large insurance

program presents a challenge to any Risk Manager, broker or insurer alike. But when the development of a program becomes or is complicated by foreign business customs, financial regulations and language barriers, the matter can become overwhelming.

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What’s the Big Deal about International?

Obvious Economic – EU, NAFTA Currency – Fluctuations/Devaluations Language – 1,652 dialects in India Political – Socialist, Conservative Exposure – Earthquake, Cyclone, Flood Time Differences

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What’s the Big Deal about International?

Not So Obvious Legal Differences – Napoleonic Code, Sharia Regulatory Environment Data Collection Cultural/Distance Issues Attitude to Risk and Safety Social Legislation Taxation

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Risk Spectrum – Who needs a Global Program?

BUSINESS ACTIVITIES

International GlobalMultinational

LESS COMPLEX MORE COMPLEX

Limited exposure to loss or liability outside of USA

• Exports, • International Travel,• Foreign Suppliers

Assets or operations outside of USA, but not

inextricably tied together

Operations usually not heavily interdependent, foreign operations may be material to the balance sheet.

International locations, Material to balance sheet,

Operations interdependent

Recognizable name, target for lawsuits, finances transcend borders, larger geographic spread

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Can’t I Just Use My Domestic Program?

Maybe – but issues arise with:

Coverage Compliance Taxation Cost Markets Program Management

International Considerations

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Key Concept Number One – Compulsory Insurance Compulsory Insurance =Those lines of insurance that are required by law for companies operating

in a particular territory – typically Automobile Third Party Liability, Work Injury and some forms of Professional Liability. Trend towards compulsory requirements for Environmental and even D&O in certain countries.

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Key Concept Number Two – Admitted Insurance

Risk based in

Country A

Policy issued by Insurer licensed or

registered in Country A

Risk based in

Country A

Policy issued by Insurer

NOT licensed or

registered in Country A

Admitted

Non-Admitted

“In over 85% of countries non-admitted cover is prohibited or restricted”

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Key Concept Number Three – Tax Treatment of Non-Admitted Loss Proceeds

Parent Entity International Subsidiary

Non-Admitted

Loss Proceeds

Income Tax

Capitalization (or Other) Tax plus Frictional

Costs

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Key Concept Number Four – Excess/DIC

Master Policy

D I L

DI

CPo

licy

Lim

it

Breadth of

Cover

Local Admitted Policies

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Key Concept Number Five – Financial Interest• Insures the parent’s interest in a subsidiary located in a

non-admitted country – local subsidiary is not an Insured• Insures the balance sheet of the parent, rather than a local

asset/interest• Settlement to the parent only, no local servicing• Policy wording developed and supported by individual legal

opinions

Subsidiary

Global Insurer Master PolicyParent /

Policyholder

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International Risk ConsiderationsOther Particular International Issues/Considerations:

Role of Broker Cash before Cover Taxes:

- Premium - VAT/Goods & Services- Fire Brigade- Catastrophe Pools

Tacit Renewal Tariff Rating Premium Allocations Underwriting Data Wording Differences in standard policies

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Communications Social and Geographic Considerations

- Time Zones- Hierarchy- Holidays- Sense of Urgency- Acronyms/Terminology- Reliance on e-mail

Managing Expectations- Clear and concise communications- Timeline

Insurance Environment in China and the UK

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Risk Review - ChinaRegulatory Constraints Key Compulsory Coverages – WC/EL (State Plan), Motor Non-Admitted Insurance Position – Not permitted Tariff Rating – national premium tariff as set by CIRC applies to compulsory motor

third party liability Wording – controlled by CIRC Cash before Cover - Advance premium payment prior to binding risk required under

certain policies by province Market Features Brokers only engaged in <5% of commercial business 60 licensed insurers – 3 largest (PICC, Ping An, China Pacific) have 68% market

share Insurer licenses are granted by province – not all companies are licensed nationally Evidence of Insurance: Typically a cover note issued by insurance carrier 

Risk Review - China

Cultural Considerations Legal Environment –Claim consciousness low Attitude towards Safety – new concept Attitude towards Loss Control –new concept Taxation Premium Tax: Small stamp duty of .1% of premium VAT/Goods & Service Tax: There is no VAT on insurance premiums, though insurers

are liable to pay VAT on material damage claims submitted by non-VAT registered policyholders.

Risk Review – United KingdomRegulatory Constraints Key Compulsory Coverages – WC (State Plan), Employer’s Liability, Motor Non-Admitted Insurance Position – Permitted, except for Compulsory lines Tariff Rating – Open rating Wording – Open wording Cash before Cover - None Market Features Brokers engaged in over 80% of commercial business Over 1,000 licensed insurers – 10 largest have less than 50% market share Evidence of Insurance: Typically a “To Whom it May Concern” letter issued by an

insurance broker 

Risk Review – United Kingdom

Cultural Considerations Legal Environment – High claims consciousness Attitude towards Safety – well developed concept Attitude towards Loss Control – well developed concept Taxation Premium Tax: 6% applicable to all lines VAT/Goods & Service Tax: There is no VAT on insurance premiums, Claims paid to

policyholders registered for VAT are settled net of this tax as they are able to reclaim any VAT incurred. Otherwise, claims payments include any VAT involved. The claims cost for identical events can, therefore, vary according to the tax status of the insured.

Key Market Features - China v United KingdomChina United Kingdom

Compulsory coverages insured in Private market

Automobile Automobile and Employer’s Liability

Non-admitted insurance Prohibited Permitted (except Compulsory lines)

Cash Before Cover Applies Does Not Apply

Insurance awareness Low High

Market size Small Large

Broker engagement Low High

Safety & Loss Control awareness

Low High

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What Can Go Wrong?

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What can go wrong? Examples

Admitted/Non-Admitted Insurance Tax Excess/DIC cover Scope of local coverage Cash Before Coverage Tacit Renewal

Emerging Issues

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Emerging Issues – What’s Next? New Markets/Opportunities: Brazil, China, India and more

Outsourcing, Off-shoring: Program impact – Contracts, Certificates, Claims

Protectionism: Regulation in Brazil, Argentina, African countries

Alternative Program Structures: fronting, cash flow, captives

Lines of Insurance: D&O, Local Umbrella, Professional Liability, Environmental (‘ELD’), Business Travel Accident and more

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Emerging Issues – What’s Next? Tax: Increasing audits

Global Insurance Marketplace: New entries into the market create different access points

Carrier Capabilities: Worldview, MyAIG, MIA and more

Role of the network insurance broker: advice & counsel in addition to service & administration

Program Performance: beyond just compliance

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Framework & Tools

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7 Dimensions of Success

Program designs are based on review of cross-border business flows and processes, addressing critical issues such as contractual obligations, interdependence and contingent clients’ exposure.

Program designs are comprehensive, including coverage as required, available and appropriate to address exposure across multiple lines of insurance and policies.

Program options factor in contractual obligations and regulatory requirements governing permissibility of admitted /non-admitted insurance, compulsory coverage, and tax.

Optimized programs that balance corporate objectives, risk characteristics and appetite, compliance, market offerings insurer relationships and available solutions.

Information regarding local policy and exposure data, events, changes in industry, business environment, regulatory, legislative and other subjects worldwide that affect client’s risk-related and corporate decision-making

Programs designed to offer efficiency in program cost, execution and administration

Structures are tailored to minimize coverage overlaps while ensuring program responsiveness and compliance where possible, with clarity in how multiple policies will respond

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AXCO AIG Multinational Design Tool description/screen shots

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Program Design Tool Explores the recommended approach for designing a multinational program,

considering local regulations, tax, coverage and claims issues. Provides risk managers with a comprehensive and holistic view of the variables

impacting their decision to insure their companies’ risk exposures locally or globally. Illustrates how particular exposures, business strategies and risk sensitivities impact a

multinational’s program structure.

Available at: www.aig.com/multinational/pdt

Calling All StakeholdersDetermining the optimal solution for your risk is complex and involves multiple stakeholders.

•Legal•Tax / Finance•Risk Management•Logistics•Facilities•Human Resources•Other – depends on organization structure

Open conversation early in the program design/renewal process is key.

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Practical Steps Get out there!

– Visiting locations aids your knowledge, credibility and leverage– Your travel saves money

Different countries, exposures, practices and surprises– Country-specific info via Brokers and Insurance Carriers– Local operations’ expectations, e.g., deductibles

Communicate – teach and sell Risk Management to all– Be seen as focused on helping local management with ops & goals;

not simply enforcing insurance compliance. – Establish local contacts; Avoid assuming all the responsibility– Keep management apprised – Local and C-Suite– Get on Business Development’s radar– Create a Risk Management webpage– Remember email’s limitations – keep it simple

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Practical Steps Periodically assess your program & players

– One size doesn’t necessarily fit all– Int’l acquisitions – assess before adding to the program– Special coverages – e.g., Pure Financial Loss, Extended Products,

Political Risk– Insurer panels– Using global insurer regional offices; broker networks

Helpful Risk Management Activities– Strategy meetings– Risk Forums

Toward Program Performance1 Establish Clear Risk Finance / Structure Objectives with KPI to

measure success

2 Utilize Pragmatic Process to Establish Options to Meet Objectives and Document Decisions

3 Ensure Strong Formalized Communication with Overseas Local Business Units Relative to Risk Management

4 Ensure Linkage With Internal Stakeholders Including both– Management– Operational

5 Clearly Document Program Intent– including roles, responsibilities and financial considerations

6 Monitor & Measure Performance

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Questions?