As an increasing number of organizations expand into foreign markets, the question of how to insure a multinational’s overseas operations has never been more complicated. The legal requirements and market practices vary across countries.
Expanding multinationals have traditionally had to choose between purchasing local insurance policies in each country where they were seeking to do business or a single global insurance policy issued in their home country.
A controlled master program offered by global carriers like American International Group, Inc. (AIG), which combines multiple local policies with a global policy, provides a hybrid solution to this dilemma. These products ensure that companies meet local mandates and corporate insurance objectives without the potential inconvenience and risk of fragmented coverage.
Considering Different Options
Companies entering new markets often go through various insurance purchasing stages as their business and risk profiles evolve.
Sonja Ochsenkuehn, head of multinational risk practice at AIG, says understanding what stage a multinational organization is in can help determine what option should be exercised. “A multinational that has limited overseas exposures such as travel or imports has a different set of considerations than a multinational with full-blown local operations.”
Following an assessment of different loss scenarios in the desired country, the multinational might initially purchase a specialty foreign package policy.
Ochsenkuehn said a specialty foreign package is a policy that offers an expanded coverage outside the emerging multinational’s home country, including loss of property, liability risks and business travel accident for their employees travelling abroad.
Things get more complicated when the multinational expands further, including from one country to neighboring countries. In a recent study of midsize companies in Europe, AIG found that multinationals at this stage of growth prefer to rely on a local point of contact for direct insurance purchases in the local market.
“At that point they are worried about unknown risks. … It’s an unfamiliar territory,” Ochsenkuehn said. “So they really push the responsibility for purchasing insurance to their local partner or point of contact.”
Further expansion into new markets, where the multinational corporation has to purchase additional local policies, accentuates the problems.
“That’s when they arrive at a tipping point because their exposures become more complex,” Ochsenkuehn said. “They realize that the multitude of insurance purchases may be better handled by pulling them all together into one multinational insurance program to really drive some of the consistency of coverage across its operations rather than relying on individually placed policies.”
Growing Interest in Alternative Risk Solutions
In some cases, a company may face a situation that traditional insurance does not address effectively. “We’ve been seeing continuous growth in alternative program structures such as captives, across the globe,” said Ochsenkuehn. “With the growing economies in Latin America and Asia Pacific, companies in these markets are expanding their businesses both in scope and geography. As a result, many of these companies are starting to adopt sophisticated risk management approaches, including captive program structures.”
However, just like the global versus local policy options, the captive route has its challenges as well. In certain jurisdictions, heightened regulation limiting exportability of premiums makes it difficult to implement captive programs.
Making Use of Resources
Throughout the various stages of developing a multinational program, companies need to have a clear understanding of their needs and to have access to information that will help them make informed decisions.
AIG offers brokers and insureds access to the Multinational Resource Center, an online resource equipped with various training materials, briefing papers and other items aimed at assisting with their decision making. In addition, multinational insureds can use AIG’s interactive Multinational Program Design Tool to help determine whether (and where) to place local policies. The interactive tool evaluates user feedback on exposures, geographic locations, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors, as well as trends. It produces a detailed report that can be used at the next level of discussion with brokers and AIG on a global insurance strategy.
Still, there are advantages in working with a trusted partner — like a broker or insurer — to understand the requirements and practices in a given country and to understand the pros and cons of different policies to avoid pitfalls.
One aspect that is at the forefront of the risk manager’s priorities is compliance. “The laws are never as black or white as we would like them to be. There are some jurisdictions where it is clear that insurance services may only be provided by a locally licensed carrier. We have seen cases in the past where noncompliance has resulted in a fine, invalidation of coverage and even imprisonment,” said Ochsenkuehn.
However, there are also practical aspects that need to be considered. A multinational with a single global policy may find itself in a jurisdiction that does not allow claims to be paid locally when there is no local policy in place.
A company in such a predicament risks “unfavorable tax consequences at the home country level or potentially at the local subsidiary level if, depending on the size of the loss and local capitalization, there is a need for a capital contribution into the local subsidiary,” said Ochsenkuehn.
Contracts with local counterparties may also require a local certificate of insurance, resulting in unexpected consequences for an insured with only a global policy in place.
These are some of the reasons a growing number of companies prefer to have local policies in place, placed either separately or through a controlled master program. But even that is not always the best option for multinationals, said Ochsenkuehn.
“At the end of the day, it depends on what your exposures are in that country,” she said.
For instance, a multinational corporation with a small exposure in a given country might chose to forego a local policy and opt to handle the risk at the parent company level.
One thing is clear: there is no one right way to structure a program. Rather, each program should reflect a particular organization’s exposures, needs and preferences considering applicable business, market and regulatory factors, and should be adaptable, from year to year, as the organization’s needs change and the global business climate inevitably evolves.