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Multinational programmes –
Exposures, Issues and Solutions
Presentation to SII/GIA Singapore
By Cameron McLisky
Regional Financial Lines Manager
Southeast Asia, China
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Outline
Who needs „Multinational solutions‟?
Increasing international claim exposures
Compliance risk
Coverage risk
Multinational insurance solutions
Q & A
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Who needs Multinational solutions?
Why do they buy?
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Looking for Consistent Loss Control Approach
Looking for Consistent Coverage Globally
Achieve Compliance
Companies with Multinational Operations (size)
Who needs Multinational Insurance solutions?
Multinational Programs provide coverage and services to corporate
customers incorporating exposure and service requirements in one or
more additional territories to that in which the parent is located.
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Why Do They Buy Multinational Programs?
Local information – claims and policy
Local boards, executives
Lower Costs
Centralized Control
Compliance
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What risks do I face as a Multinational?
Claims Risk
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Evolving international D&O litigation landscape
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282
200
134
2007 2008 2009 2010
Non-US D&O suits (publicly available) increasing: Source: Aon
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Evolving international D&O litigation landscape
Largest Non-US D&O losses:
Rank Company Home Country Jurisdiction Total Paid
1 Unilever N.V Netherlands Germany $396m
2 Royal Dutch Shell Netherlands Netherlands $352m
3 Biovail Canada Canada $138m
4 Aristocrat Leisure Australia Australia $124m
5 Otto Group Germany Germany $104m
6 RIM Canada Canada $99m
7 Brookfield Multiplex Australia Australia $97m
8 Livedoor Japan Japan $81m
9 YBM Magnex USA Canada $56m
10 Sons of Gwalia Australia Australia $55m
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Claims activity and landscape, Southeast Asia & China
Thanachart Capital PCL Chairman and Executive Chairman Jailed (Thanachart Capital Public Company Limited : Mar 2010, Reuters, Thailand)
2 directors fined for wrongdoing (JEL and Lindeteves Jacoberg: May 2010, Straits Times, Singapore)
Chinese tycoon Huang Guangyu sentenced to 14 years in prison (Gome Electrical Appliance Holdings: May 2010, China Daily, China)
Company Director jailed for GST fraud (V-Teb Services Pte Ltd: July 2010, iras.gov.sg, Singapore)
Company director jailed and fined for manpower expenses (Goldrich Venture and Gates Offshore: Sept 2010, Channel News Asia, Singapore)
Ex-MD weeps over day’s jail and fine (Pancaran Ikrab Berhad : The Star, Oct 2010, Malaysia)
Ma Siu Kwan and company fined $10,000 for unlicensed dealing in securities (Hong Kong Business Agency Group Limited: SFC HK, Oct 2010)
Philippines partner of petroleum giant fined for oil leak (Royal Dutch Shell / First Philippine Industrial Corp: Deutsche Press-Agentur, Nov 2010, Philippines)
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Claims activity and landscape, Southeast Asia & China
Pheim Asset Management in Singapore – CEO guilty market rigging(Pheim Asset Management Sdn Bhd : October 20, 2010, Business Times, Singapore)
Anti-cartel suit filed vs. LPG Dealers in Manila (19 October 2010, Philippine Daily Inquirer)
Company director faces 46 charges of cheating Affin Bank of RM99.1mil in petroleum transactions (Affin Bank: The Star, Dec 2010, Malaysia)
Thailand SEC files complaint against UBS Securities Executive for dishonesty client trades (11 November 2010, Thai News Service)
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Evolving international D&O litigation landscape
Hong Kong
Regulators increasingly active – clear correlation in frequency and
severity of D&O claims
HK Securities and Futures Commission (SFC) - 161 cases 2007-2008.
In 2009-10 increased to 298.
Independent Commission against Corruption cases saw 27% increase
2010 over 2009
Taiwan
True class-action environment. Shareholder and Futures Investor
Protection Center (SFIPC) – government funded.
75 open claims, 25 successful cases.
Quantum's range from $100k to $5m.
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Evolving international D&O litigation landscape
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What risks do I face as a Multinational?
Compliance Risk
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Admitted vs. Non-admitted insurance
Many jurisdictions require insurance to be placed with locally
licensed insurers – „admitted insurance‟.
In many countries, especially for D&O and PI, laws are
undeveloped and unclear as to whether non-admitted insurance is
allowed.
Tie-in limits to a global master may be allowed, but some
countries specifically bar it.
DIC/DIL may be allowed, but some countries bar it.
Most programmes still written on a global/non-admitted basis
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Admitted vs. Non-admitted insurance
Penalties for breaching admitted insurance laws can apply to
insurer, insured and broker:
Case 1: Regulator in Argentina imposed fines in respect of
unauthorised (non-admitted) life insurance transaction – insured
fined 8 times insurance spend, broker 15 times the premium.*
Case 2: Swiss insurance broker purchased a compulsory PI policy
from a foreign insurer not admitted ins Switzerland. Swiss regulator
didn‟t accept it as a valid contract, and prohibited the broker from
practising in Switzerland.
* Source – Zurich Financial Services
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Tax
Some companies view tax as the key drive to buy compliant
multinational insurance programmes.
Insurance tax and income tax implications.
Premium tax may be payable where no local policy issued, if
global cover is applicable.
„Kvaerner‟ case
European Court of Justice ruled that Kvaerner had to pay Dutch
premium tax on its portion of a global PI policy that covered a
Dutch subsidiary, irrespective of fact that they didn‟t have a local
policy and didn‟t pay their parent any premium contribution.
If non-admitted insurance is bought, insurer won‟t want to pay
tax, and if insured does local tax regulators will be alerted.
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Tax
Potential for income tax issues where local paper not
purchased, e.g.:
Parent arranges global non-admitted policy, apportions premium
to overseas subsidiary but only pays tax in head office country.
Foreign subsidiary suffers $5m insured loss, but insurer,
unwilling to transact business in a non-admitted country, remits
payment to parent company.
Parent could be liable to pay income tax, as this is not their loss.
At 30% tax rate = $1.5m. If parent indemnifies subsidiary that
unit might have its own income tax obligation, as there is no
policy to apply the funds against. At 30% tax rate on the
remaining $3.5m = $1.05m. Total potential tax of $2.06m!
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What risks do I face as a Multinational?
Coverage Risk
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Corporate Indemnity
Close to 10% of countries worldwide bar corporate
indemnification of executives.
Over half of all countries don‟t have legislation specifically
addressing corporate indemnification.
Some legal view that a parent can contract directly with
executives of foreign subsidiaries to indemnify them, and it won‟t
be caught by a local bar on indemnification.
However, clearly much uncertainty about ability of executives and
subsidiaries to rely on local and parental indemnity.
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Policy Coverage
Relying on a single global policy ignores how local laws may
impact coverage, e.g.
In Italy insurers must provide 15% additional defence costs
limit on top of traditional aggregate limit.
In many countries (France, Sweden, Thailand, Taiwan, China)
policies must be written in the local language.
No Insured vs Insured exclusion allowed in Germany.
Most countries have specific legislation that must be
recognised in general and claims condition language.
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Multinational Solutions
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Controlled Master Programs
Freedom of Service Policy (FOS) - Europe
Non-Admitted Program
Fully Admitted Program
Multinational Solutions - Various Policy Options
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Fully Admitted Programs
Targeted Benefits Potential Disadvantages
• Fully legally and tax compliant
• Policy issued in local language and
meets all local requirements
• Local entity has local insurer office
they can talk to
• Local claims handling
• Cover will include any local
„anomalies‟
• Unfamiliar terms and conditions
• Generally higher rates, local
experience rated
• Local conditions / warranties might
apply
• Lack of flexibility in policy language
• Premium may be required for
coverage to be effective
Local operations purchase locally admitted coverage as needed
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Non-Admitted Programs
Targeted Benefits Potential Disadvantages
• One single policy – centralized
control
• Flexible rates
• Familiar terms and conditions –
consistency
• Ease of administration
• Absence of currency and language
problems
• Local service can be difficult or non-
existent
• Premium is not tax deductible locally
• Paid losses may be subject to
income tax
• Fines and penalties
• Non-compliant in the majority of
countries!
Extend coverage from domestic policy responding to losses outside of
home country territory
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Freedom of Service (FOS) Europe
Targeted Benefits Challenges
• Fully Admitted EU countries plus three
• Fully legal and tax compliant
• Single policy covering multiple
territories
• Reduced distribution costs – no
minimum premium to issue paper in
every territory
• Single point of change for policy
endorsements
• Single policy covering multiple territories
• No uniform cross-EU insurance regulations
• Unclear what laws & regulations apply to
FOS policies issued in another Member
State
• No central “amendatory endorsements”
library
• One central premium collection with
multiple IPT declarations and payments
• Compliance with local pools, for example,
Consorcio/Cat Nat or terrorism,
• Local language certificates
• Local claims handling – not suitable for high
frequency programs
Insurance contract placed in one EU/EEA country is valid in all countries in
both regions.
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Controlled Master Programs
Targeted Benefits Challenges
• Fully legally and tax compliant - in all
countries
• Policy issued in local language and
meets all local requirements
• Local entity has local insurer contact,
supported by global relationship
• Local claims handling, global
claims/loss reporting
• Consistent broad coverage through
Master Policy Difference in
Conditions/Difference in Limits cover
• Global leverage – pricing/priority
• Insured information capture
• Timely communication & coordination:
– within Insured globally
– Between Insured, Broker's) and
Insurer (locally/globally)
Master policy with extended coverage for territories outside of home
countries. Locally admitted policies agreed as needed by insured, broker
and insurance carrier
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Controlled Master Program
Program Design
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Controlled Master Programme Options
Option 1
Indemnity Agreement
Option 2
Passport Endorsement
Option 3
Tie-in of Limits Endorsement
Method used to share a single
worldwide aggregate.
The only option for clients
requesting limits in the aggregate
grater than USD 200M.
Parent Corporation to execute
an Indemnity Agreement prior to
binding.
Provides a single worldwide
aggregate limit of liability.
Master Policy terms, conditions
& exclusions govern the economic
relationship
Credit analysis required.
Governs the intention of the
Passport program.
In all events, maximum amounts
insurer will pay is the limit of the
Master Policy.
If claims paid under the
underlying policies and the Master
policy exceeds the aggregate limit
of the Master Policy – the Policy
holder is responsible for
reimbursing insurer the amount in
excess of the aggregate Master
policy limit.
No Tie in of Limits required.
Underlyers & Master policy
aggregate limits manageable in
size
Tie – in of Limits endorsement
applied to every underlyer & Master
policy.
No Indemnity Agreement or
Passport structure required.
This option is subject to underlyer
policies each having a low limits (eg
USD 5M) with a total program
aggregate (Master plus all
underlyers) of a manageable size.
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Indemnity Agreements
Where there is no re-imbursement where the underlyer provides
wider coverage than the Master
Allows the Insured to gain the benefit of wider coverage on a
local underlyer than on the Master
AP charged if there is a significant increase in cover/risk
Endorsement must be added to the Master to ensure that the
wider coverage cannot be applied to this policy
Re-imbursement where the underlyer provides wider coverage
than the Master
The parent company is liable for any claims paid out where the
local underlyer has wider coverage than the Master.
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Difference In Conditions / Difference In Limits
Difference In Conditions (DIC)
If the standard of the local cover is different, then the “top-up” cover
provided by the global programme (Master Policy) is called Difference in
Conditions Insurance.
Difference In Limits (DIL)
If the sum insured or local policy limits are different, then the “top-up”
cover provided by the global programme (Master Policy) is called
Difference in Limits Insurance.
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Intended to extend coverage on Local Policies and apply Master Policy Terms &
Conditions locally (where legally permissible)
Can be used without additional premium
Applied to Master Policy only
No need to use tie-in of limits on local policies
Provides excess coverage where local policy limits are lower than the Master
- this will be paid to the Parent Company where legally permissible
DIC Endorsement
DIC/DIL Endorsement
Intended to allow local Insured to access full limits applicable to Master Policy
when Local Policy limits are reached (where legally permissible)
In practice DIL will allow insurer to pay claims to the Parent Company. It is usually not permissible to pay claims under the DIL directly to the Local Insured if an admitted policy is
required.
If DIL is used then additional premium is required - if we do not apply additional premium to the local policies it could potentially raise issues should we pay a claim into the local
territory in regards to a) tax and b) cost of capital
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Function of the Master Policy incl. DIC/DIL
Explanatory Note:
DIC = Difference in Conditions
DIL = Difference in Limits
Integrated Local Policy
Master Policy Limit
Local Policy Limit
Agreed deductible
per each claim
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Tie-in of Limits – Key Issues
Likely to be most common structure for multi-national
programmes.
Parent company has a master policy and each foreign
subsidiary has a local policy with the limits all tied-in, so
that the global aggregate is no greater than the limit the
parent company buys.
Good for insurer – solves capacity issues.
Good for insured – premium savings, but is an admitted
programme. DIC/DIL can cover gaps in cover and limits,
and policies are the local version and filed.
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Tie-in of Limits – Key Issues
But…
Some countries don‟t permit DIC/DIL (including Brazil,
India, Argentina).
Some countries don‟t permit tie-in of limits.
Full limit loss by parent will exhaust cover for subsidiaries.
DIL payments to parents may have tax issues.
Administration fees can add up.
Solutions..
Separate parent agg and one agg for subsidiaries.
Admitted Side-A only policies in each country
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Premium Allocation – Considerations
Underwriting Factors Country Factors
• Major Line
• Minor line of business
• Premium Exposure/Rating
base
• Risk Factors
• U/W Factors
• Claims‟ Experience
• Compulsory local retention
• Tariff rates
• Local premium must be consistent
with local underwriting practice
• Local override
• Minimum Premium?
• Insurer and Reinsurer Payable taxes
• Exportability of premium & PPWs
• Premium reserves
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Tariff Rated?
Local Pools &/or reinsurance requirements
Local Taxes & premium exportability
Licensed line of business?
Insurer-owned network?
Country Specific Considerations include:
Manuscript vs Local Standard?
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Countries to watch out for – include;
BRAZIL
INDIA
PAKISTAN
BANGLADESH
RUSSIA
CHINA
EGYPT
NORTHERN CYPRUS
SOUTH KOREA
JAPAN
PUERTO RICO
AUSTRALIA
CANADA
US
MALAYSIA
NORWAY
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Countries to watch
India
All risks located in India must be insured by a locally admitted insurer - Non-admitted insurance is not allowed.
Issuance of underlying policies by non-admitted insurers is not allowed.
Claims cannot be paid or adjusted unless a local policy is in place.
A specified mandated portion of every risk has to be obligatorily ceded to the General Insurance Corporation of India (GIC), the National Reinsurer.
Brazil
All risk located in Brazil must be insured by an Admitted company;
Non-Admitted insurance is strictly prohibited;
Issuance of underlying policies is not allowed;
Claims cannot be paid or adjusted unless a local policy is in place.
In addition, in Brazil all reinsurance must be done by the Brazilian Reinsurance Monopoly (IRB):
Non-compliance - for the Insured, fines up to the sum insured or reinsured;
Non-compliance - for the Insurer, sanctions may be applied, ranging from simple warnings to suspension or cancellation of operating license.
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Controlled Master Program
Submission Quote Bind Implement
Program
Review
ProgramRenewal Plan
90-120 Days
> Before
Effective
30 Days >
Before
Effective
On or
Before
Effective
4040
Chartis is a world leading property-casualty and general insurance organization serving more than 40 million clients in over 160 countries and jurisdictions. With a 90-year history, one of the industry‟s most extensive ranges of products and services, deep claims expertise and financial strength, Chartis enables its commercial and personal insurance clients alike to manage virtually any risk with confidence.
Chartis is the marketing name for the worldwide property-casualty and general insurance operations of Chartis Inc. For additional information, please visit our website at www.chartisinsurance.com. All products are written by insurance company subsidiaries or affiliates of Chartis Inc. Coverage may not be available in all jurisdictions and is subject to actual policy language. Non-insurance products and services may be provided by independent third parties. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds.
The data contained in this presentation is for general informational purposes only. The advice of a professional insurance broker and counsel should always be obtained before purchasing any insurance product or service. The information contained herein has been compiled from sources believed to be reliable. No warranty, guarantee, or representation, either expressed or implied, is made as to the correctness or sufficiency of any representation contained herein.
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