Regardless of whether your business
exports a few products overseas or is a
far-flung multinational, assessing your international insurance coverage is important to limit exposure, particularly in this
ever-changing global economy.
“There are many factors that must be taken
into account before a business can be fully
insured overseas, including ever-changing
compliance and regulatory issues within a
country,” says Steve Henthorn, the director of
Aon Global Client Network for Aon Risk
Smart Business spoke with Henthorn
about how businesses can determine if their
overseas operations are adequately covered
and what to do if they are not.
What challenges do businesses face today
when operating an organization abroad?
Legal environments are constantly changing. The United States has exported some of
its litigious culture to Europe. The EU and its
member states are not always consistent in
their approach to products liability issues.
There is also an increase in ‘forum shopping’
(favorable jurisdiction to bring a lawsuit and
more class actions suits).
The placement of D&O policies is also
undergoing a significant change. Historically,
a single policy was issued in the corporate
home country, intending to cover exposures
on a worldwide basis. Now, policies are being
issued in numerous countries for tax reasons, indemnification considerations and at
the request of local directors or officers who
want to make sure coverage is in place.
There are other pressing challenges as well:
- Compliance. Regulations vary depending
on the country and can change periodically.
Two examples are: the proper payment of
insurance taxes (which can change as local
tax structures change), and the use of local
policies rather than ‘nonadmitted policies’
(policies issued in one country to protect
clients with operations in a second country).
In some countries, ‘nonadmitted’ policies are
allowed, but in others, it is strictly forbidden.
- Emerging nations (BRIC — Brazil,
Russia, India and China). Nearly all major
multinationals are setting up shop in one, if
not all, of these countries. There are some
interesting challenges in these countries. For one, the regulatory landscape is a moving target and must be constantly monitored.
Second, while we have a pretty good understanding of natural hazard exposures in the
United States and Western Europe, the same
cannot always be said for the BRIC nations.
Because we cannot always assess the risk
from earthquakes, floods and windstorm
with the same degree of comfort, a business’s
operations and profits may be vulnerable.
- Political risks. In some cases, insurance
is available for political risks, and in other
cases, it is difficult to get insurance. One risk
is that if a country nationalizes outside ownership, such as Venezuela has, it becomes a
major problem for multinationals operating
in that country. Another major concern is
inflation because a business can quickly
become underinsured in a country with high
inflation. This is why it is important to
reassess an overseas policy annually.
What can businesses do to make sure that
their international operations are covered?
Risk managers need to do a risk assessment for operations abroad exactly the way
they would conduct an assessment in the
United States. Remember, a building in
Shanghai can burn to the ground exactly like
a building in Cleveland. Similar approaches
are needed to protect the property.
This process includes taking inventory of
assets and the insurance the business currently has to cover these assets. It also
involves assessing the costs to replace equipment and property, and any interdependencies with other companies (such as suppliers) that could negatively impact sales.
Is just one insurance company enough to get
The number of underwriters required to
adequately insure a multinational company
varies. Some companies are licensed in many
countries and can match the global footprint
of major multinationals. Rarely, however, is
one insurer used for all coverages. Property
and/or liability coverage may be provided by
a group of carriers. Finally, certain programs
must be underwritten ‘in-country.’ Selection
of insurers should be based on coverage,
costs, services and financial security.
It is common for both liability and property
coverages for a Controlled Master Program
to be created. Local policies are issued and a
Master Policy written in the home country.
This approach fills in the gaps between a very
broad corporate contract and what may be
good local standard.
What can happen to a business when it does
not have adequate international insurance?
One major area of concern — that can be
covered by insurance — is problems within
the supply chain. More companies are sourcing component parts from around the world.
Problems can happen anywhere along the
way. For example, if a natural disaster damages or shuts down a supplier’s factory, the
company won’t be able to make a complete
product, and it will lose sales and market
share, and earnings will go down.
The general impact of not having international insurance is very much like not having
insurance in the United States. The corporation is exposed to financial loss, which often
can be huge.
STEVE HENTHORN is the director of Aon Global Client Network for Aon Risk Services, Inc. (www.aon.com), a risk management, human
capital and reinsurance consulting firm based in Cleveland. Reach him at (216) 623-4153 or [email protected].