XL Insurance: The Global Insurance Puzzle - Jonathan Post
Globalisation may bring many benefits, but insuring all your far-flung operations can be a risk management nightmare. Jonathan Post, XL Insurance’s general counsel for global programmes – Europe/RoW, explains how companies can ease their burden.
Providing globally compliant risk management solutions to multinationals has never been more important. In a recent survey by Strategic Risk magazine, 67% of corporate risk managers saw ‘compliance with a wide variety of regimes as a growing risk of globalisation’.
Put simply: how can your subsidiaries enjoy integrated and consistent cover worldwide while at the same time respecting local market practices and regulation and accessing local coverage and loss solutions?
The urgency of meeting this complex challenge can only grow as multinationals increasingly turn to emerging markets with unfamiliar laws and regulators to supply their service and manufacturing requirements.
INSURING IN THE OLD WORLD
For the last 30 years, the large insurance groups have turned to global programmes to solve this issue, using their network of licensed subsidiaries and other admitted carriers.
Like its peers in the global insurance market, XL Insurance issues policies on a fully-licensed basis in many countries worldwide and is ‘passported’ by virtue of the EU’s freedom of services principle across the 30 countries of the European Economic Area. In addition, XL’s strategic business partners issue fully admitted policies in many more countries.
While a fully licensed local solution is the preferred option, this is being more complex as clients increasingly outsource their operations. The gaps in licensed capacity are becoming steadily more apparent.
And issuing local policies everywhere, even if that was practical, would not provide the integrated solutions sought by today’s multinational clients. To provide consistent coverage worldwide, global programme insurers look to provide ‘umbrella’ coverage, known as ‘difference in conditions/difference in limits’ or DIC/L. This insures the difference (if any) in terms and limits between the local and master policies.
It is a powerful tool and fundamental to the operation of global programmes because subsidiaries have local coverage in familiar terms and languages that they can show to their regulators or contractual partners if they are required to do so. It also means that global risk managers know that if it is a covered loss in the US, it is also covered in Manchester, Morocco, Mali and Mozambique.
UNDERSTANDING LOCAL REGULATIONS
Problem solved, then? Perhaps not: DIC/L coverage is generally provided on an unlicensed basis, and regulators around the world are increasingly turning their attentions to insurers providing coverage above or outside the local policy while tax authorities are wondering whether they should be getting insurance premium tax on the DIC/L coverage offered out of the master policy.
So how do we fix this problem? First, we did some homework. While almost every country with insurance legislation requires an insurer to hold a licence, each has a different idea of what ‘carrying on insurance’ actually means.
For example, a non-US licensed insurer can provide insurance into every state on the basis of ‘direct procurement’ by a policyholder located in that state. Furthermore, some states allow larger ‘industrial insureds’ to receive insurance from insurers operating without a license.
It is thus vital to know where it is possible to provide unlicensed coverage into a country without falling within its definition of ‘carrying on insurance’ or otherwise breaching the applicable licensing law. To achieve that, XL Insurance compiled a detailed database of the licensing law in 157 countries. It now knows where it can provide DIC/L cover under the master policy and where it cannot. As a result, XL Insurance provides ‘permissible unlicensed’ coverage for territories where it is confident it can legally provide cover on an unlicensed basis.
THE FINAL PIECE
In countries that legislate that citizens and local risks must be covered by a domestically-licensed insurer, it is impossible to provide unlicensed cover. Opening local branches and applying for licences for every jurisdiction is not really an option. It is also not always practical to create local ‘fronting relationships’ with domestically-licensed insurers – some of which will not offer the level of financial security that multinationals require.
Since providing insurance to such subsidiaries is not permissible, XL Insurance first 'uninsures' the relevant subsidiaries. The master policy will generally define the insured as, for instance, ‘Abc Corp Inc and its affiliates and subsidiaries worldwide’, the subsidiaries being covered for DIC/L only. Since some of those subsidiaries cannot permissibly be given, or receive, cover under the master policy, the terms need to state that cover will only be given to subsidiaries on an unlicensed basis if the precondition of legality is met. In this way, all but the subsidiaries that cannot legally be insured are covered.
While these uninsured subsidiaries are not insured under the contract of insurance, the basis of cover clause insures their parent in respect of its interest in them. This includes all the parent’s economic, financial and strategic interests in the continued operation and good standing of its offspring.
Such an interest is valuable and insurable; but precisely measuring the parent’s loss in the event of any adverse development affecting its subsidiaries would be complicated and time-consuming, if not impossible.
XL Insurance’s solution to this problem is similar to an agreed valuation clause. Quite simply, we calculate any loss to the parent’s financial interest in the same way it would do so if the subsidiary in question was in fact insured under the policy. Questions of coverage and quantification of the parent’s loss are answered as though the subsidiary was in fact insured; but the loss is that of the parent. XL Insurance believes that this financial interest coverage is the final piece in the puzzle that, together with fully-licensed and permissible unlicensed solutions, finally allows it to put together a compliant global programme.