Risks from natural disasters, theft or vandalism exist for businesses anywhere in the world. As businesses operate more globally (each year more U.S. businesses conduct at least part of their operations abroad), owners need to realize that risk varies depending on where business is done.
Some countries have inadequate water supplies to put out fires or may not have reliable power supplies to trip security systems. Code enforcement may be lax or even nonexistent. Plus, some continents are more prone to extreme weather, such as tornadoes, tsunamis and earthquakes, or other risks such as terrorism or political unrest.
Thus, you may be exposed to financial disaster if your insurance policy does not cover your operations in another country, says Leo Walter, an executive vice president for Aon Risk Services Inc.
“Today, many companies, including small businesses, may have expanded their reach globally and rely on overseas operations for their supply chains or finished goods,” Walter says. “It only makes sense that these investments should be adequately protected.”
Smart Business spoke with Walter about options companies have in assuring that their assets in the U.S. and abroad are covered.
How can companies with overseas operations ensure that investments are protected?
The first line of defense is to assess the risks a company may be exposed to in its overseas operation, and then try and mitigate those risks. Have a serious conversation with top executives in your company about the risks you’re willing to bear and what risks need to be protected by insurance. Several insurance policies can come into play overseas, including property and marine insurance, as well as political risk insurance, which protects real and personal property. Basically, there are several types of insurance products that can cover overseas operations, including admitted programs, controlled master programs and nonadmitted policies.
Could you explain these specific types of insurance policies?
It is important to pay attention to a foreign country’s insurance requirements because some places require businesses to purchase and maintain a ‘local admitted policy’ that may not include the type and amount of coverage needed. These policies can be beneficial because they do comply with a country’s particular insurance regulations and allow claims to be made locally. A ‘controlled master program’ (and/or marine program) lets a business maintain a consistent insurance level locally and internationally, no matter where the business is in the world. It also allows local admitted policies when necessary.
For many companies with limited overseas operations, a ‘nonadmitted program’ is the most effective vehicle for providing international coverage. The phrase ‘nonadmitted’ refers to policies covering overseas exposures that are placed in the U.S., with all premiums and most claims paid in the U.S.; no local policies are arranged overseas to comply with local insurance laws and regulations.
Generally, a nonadmitted program is utilized by companies that meet specific criteria, including:
- A U.S. company that does not have a
local subsidiary, taxable entity or other permanent legal presence in those countries
with restrictive insurance regulations.
- Local exposures do not include ownership of vehicles, employment of local
nationals or other exposures that may fall
under a country’s mandatory insurance
- A U.S. company that operates overseas
only through branch offices, joint ventures or
- Overseas assets are carried on U.S. or
other offshore company balance sheets.
- Loss payment does not need to be taken
in the overseas location.
- Admitted insurance is not required by
- Evidence of admitted insurance, such as
certificates of insurance or shipping documentation for customs purposes, is not
To complicate matters further, many countries have their own rules about ‘admitted’ and ‘nonadmitted’ insurance and their own definitions of these terms. So it is important to check with a broker that works with international policies and understands international insurance legislation. Companies’ foreign assets are also at risk for potential losses resulting from confiscation or physical damage from political violence.
What does it take to put together a successful insurance plan for U.S. businesses with operations overseas?
There needs to be a detailed review and assessment of all physical exposures (internal and external) on a worldwide basis. You also need to assess your company’s tolerance for risk. A detailed and tailored strategy then needs to be developed. To execute global programs, global corporations need a brokerage partner that is aligned with their interests and country locations and that is able to share, plan and execute their strategy across borders. It’s important that the foreign offices are owned by the insurance brokerage firm for consistency and control factors, as opposed to a network of affiliated offices.
LEO WALTER is an executive vice president for Aon Risk Services Inc. (www.aon.com), a risk management, human capital and rein-surance consulting firm, and the largest middle-market insurance brokerage firm in the world. Reach him at (330) 571-3152 or at email@example.com.