The common questions and overlooked benefits of global programmes

Introduction by Shiwei Jin, Global Programs & Captives Regional Director APAC, AXA XL, a division of AXA

Global insurance programs are an essential tool for many multinational companies, and their features and benefits have been documented extensively. These include broad, consistent coverages with no gaps or overlaps, more effective enterprise risk management and enhanced control over claims. Global programs can also promote greater capital efficiency; by aggregating individual country risk, companies can retain more risk at the enterprise level – that’s even more beneficial when a captive is used to cover the retentions.

While these benefits generally are well-known, clients and intermediaries across Asia also routinely raise questions about global programs. Moreover, there are other ways global programs add value that are sometimes overlooked.

My colleague, Dan Fay, is on the frontlines helping international companies design and implement global programs to mitigate their liability risks. In this article, Dan addresses some of these common questions and highlights a few of the under-appreciated benefits of global programs. In subsequent articles, colleagues responsible for other lines-of-business will share their insights on these and other topics – so stay tuned.

Common questions and overlooked benefits

by Daniel Fay, Head of International Casualty-Asia, AXA XL, a division of AXA

Compliance, compliance and more compliance

While hardly a new issue, compliance remains a top question/concern for two reasons. First, regulations concerning local retentions are evolving in many developing countries. In the past, local policies in developing countries with immature insurance markets often were issued by a fronting partner that ceded the entire risk back to the master insurer. That’s changing. Many developing countries today are taking steps to create more stable and robust local insurance markets. Driven by a mix of formal regulation and market practice, more and more countries now require local insurers to retain a minimum portion of the premium and risk locally. However, these required local retentions vary considerably between countries, as do the rules concerning admitted vs. non-admitted insurance.

Second, governments in mature markets continue to enact regulations impacting particular business activities and risks. For example:

• In South Korea, operations with a high risk of causing environmental damages must be covered by a mandatory Environmental Liability policy. The requirements are very detailed and specific, and the penalties for non-compliance are severe.
• Many companies selling medical devices in the EU, including in vitro diagnostic devices, will have to conduct new clinical trials to comply with more stringent certification and licensing requirements. While global programs can be an excellent vehicle for covering clinical trials, existing programs most likely will have to be modified, including with higher limits, to comply with these new requirements.
• In Spain, a wide range of companies are required to maintain financial reserves to cover the costs of environmental damages. They also must conduct an environmental analysis to establish the size of these reserves.

These are just a few examples of the ever-evolving patchwork of regulations and requirements that companies need to understand and take into account when designing and implementing global insurance programs. That’s also why it’s important for clients to obtain the right advice early on to ensure compliance for the placement as well as the critical timelines for inception of cover, e.g., cash before cover, or premium payment warranties.

The value of a holistic approach

Times are changing. Globalization is increasing access to world markets, presenting attractive growth opportunities for business. It’s also adding complexity to trade and more exposure to risk.

From a risk management perspective, the opportunities and challenges associated with globalization reinforce the value of a holistic approach that aims to minimize exposures and limit losses. After all, transferring risk via insurance should be considered as a last resort for protecting a company’s balance sheet.

In Asia, risk management is still developing, and the focus is shifting in many firms toward a more holistic and integrated approach. Also, as companies’ international operations, and exposures, become more pronounced, the benefits of proactively managing enterprise risk are gaining greater visibility on the management agenda.

Today, more and more companies in Asia are beginning to recognize that giving only cursory attention to enterprise risk management could limit their future growth potential and competitive advantages, especially as the risk landscape evolves and becomes more complex. That’s creating an incentive for companies to develop a more thorough understanding of their exposures, and as importantly, to carefully examine their existing insurance coverages.

For example, one of our clients previously had a highly decentralized program with a diverse set of locally purchased commercial general liability (CGL) policies. The limits, terms and conditions, and exclusions varied widely. Along with the administrative burdens involved in managing numerous standalone policies, the client had significant coverage gaps and potential compliance issues. The various insurers involved also meant a broadly inconsistent level of service and policy response, adding to a high level of uncertainty.

Our assessment led to detailed discussions with the client and broker, enabling all parties to openly discuss the client’s needs as well as issues with the existing set-up. This helped us arrive at a more effective and sustainable solution, ensuring compliance with local regulations, consistent coverage and service, and a more efficient placement through centralized coordination. Our solution also supports the client’s growth plans, ensuring coverage is in place when it expands into new territories.

Admittedly, the premium for this solution was higher than what the insured paid previously. Nevertheless, when realizing the improvements to their program and the benefits it brought to their business, the premium became less of a priority. Don’t get me wrong, price is important. However, the eventual costs of not having the right solution in place can be greater – perhaps considerably so – due to coverage gaps, inadequate limits, fines and penalties from non-compliance. The moral of the story: Companies should act as a prudent uninsured, but when a loss happens, be sure to have an insurance partner and solution that provide the protection you need to quickly and confidently resume business.

Understand the risk to provide the right solution

One size doesn’t fit all.

While we tend to group risk into broad categories – liability, property, financial lines, etc. – the context is critically important and distinctive. Our CGL policies, for instance, apply across different industry sectors, products, applications, legal jurisdictions, and on and on. And even within the same sector or product category, or even the same company, individual risks can differ considerably in terms of the quality or experience.

Underwriters are innately curious people who ask questions to better understand the risks we are being approached to insure. By not asking the right questions, or not asking questions at all, we could be underestimating the exposure or misunderstanding the solution the company needs.

For example, one client started to use unmanned aerial vehicles (UAVs) – aka drones – for different purposes. Regulations on drones are still very much a work-in-progress in many countries, and the exposures range from third-party physical injury to property damage to invasion of privacy. In this case, understanding the nature of the client’s drones, their applications, the controls adopted by the company, and the applicable regulatory requirements were critical.

In this instance, we were initially somewhat wary about covering this risk, but after investigating further and learning more about how the client is managing their exposures, we felt comfortable covering it in the respective global programs.

This example also underscores why it’s essential for clients to explicitly disclose their uncommon risks, otherwise they run the risk of being uninsured.

Helping companies mitigate atypical exposures is one of the overlooked benefits of global programs that I alluded to earlier. From a design standpoint, they can be covered via specific or conditional extensions, sometimes with dedicated sublimits and/or higher deductibles, or additional premium. A lot depends on understanding the exposure and how it is managed.

Regardless of the details, this approach has two advantages: First, including additional non- or lowly correlated risks into the overall program can serve to reduce volatility and, in turn, positively impact pricing. (These factors also apply to the case for diversifying the risks covered by a captive.) Second, procuring standalone policies in different countries for various specialized risks can be time-consuming and resource-intensive; covering these risks via a global program naturally lessens those administrative burdens.

Finally, as Shiwei noted in her introduction, global programs can be an effective vehicle for promoting greater safety and protection. This is a broad topic that we intend to explore more fully in a subsequent article. For now, though, I would note that one way this can be accomplished is via the premium allocation process. That is, when allocating premiums and setting retentions for local operations, the corporate risk manager has powerful levers for rewarding those subsidiaries that are successfully minimizing their exposures; and vice-versa.