Unprecedented events over the past year and a half have shed light on the world’s interconnection in addressing global challenges to business and society. Natural disasters, COVID-19 and social unrest contributed to an environment where it has become even more imperative for companies with international reach to structure insurance coverage offering protection against emerging risk exposures.
A multinational insurance program should be designed to respond to global incidents that are difficult, and sometimes impossible, to predict. Risk managers navigating the nuances of insurance protection for foreign operations are well advised to understand the complexities of global coverage to consistently manage an unexpected loss regardless of the country or jurisdiction where the claim occurs. Risk managers overseeing multinational operations should work closely with their agents, brokers and insurance carriers to design a holistic global insurance program that includes appropriate coverage everywhere they do business.
Critical Drivers of Emerging Risks
The world has become increasingly sensitized to emerging risks as governments, businesses, and societies grapple with the lingering economic impact of COVID-19 disruptions. Many critical drivers of emerging risk are expected to center around political, technological, and societal issues. According to the World Economic Forum’s Davos Agenda, in the medium term, the global economy will be “threatened by the knock-on effects of the coronavirus crisis, while geopolitical stability will be critically fragile over the next five to 10 years.”
Political risk may give rise to protectionism in certain countries to fuel sustainable economies. The mentality could result in export restrictions, disrupted supply chains and national policies mandating tighter scrutiny of in-country foreign operations and investment. Rapid digitization throughout internet platforms worldwide and broadening of user connectivity have also heightened business exposure to cyberrisk and digital threats. According to a report released by data aggregator Broadband Search, “in 2020, more than 50.3% of all internet traffic was conducted on mobile phone devices,” a trend likely to continue upwards.
Among emerging societal concerns, environmental occurrences and climate-related risks are becoming perceived influencing factors as global economies gradually recover. A report by McKinsey Global Institute, Global Risk & Response Physical Hazards and Socioeconomic Impacts, stated that “financial markets could bring to light new risks in affected regions, with consequences for capital allocation and insurance. Implications of “climate risk could make long duration borrowing unavailable and impact insurance costs and availability,” signaling the potential for capital and asset reallocation throughout a multinational’s global supply chains.
Master Policy Enhancements
Countries around the world have specific, constantly changing laws, rules and regulations regarding if, how and where insurance payments can be handled for satisfactory claim resolution. Given the varied filing and capital requirements, coverage form terms, conditions and available limits, “standard” policies can differ widely from country to country. Regulatory and legal provisions dictate how and where claims payments can be satisfied. For U.S.-based multinationals, a U.S.-domiciled master policy must be in place for coverage to interact with foreign in-country policies. Incorporating difference in conditions (DIC) and difference in limits (DIL) clauses can prove to be a valuable enhancement to the master policy for desired uniform terms, conditions and limits on a global scale to help prevent coverage gaps in countries where the multinational conducts business.
A master program with DIC/DIL features benefits the multinational with operations worldwide but are insured under locally issued policies. The DIC clause provides that if a claim occurs against a locally issued in-country policy, but the terms of that policy do not respond, the master policy’s broader terms will apply to cover the loss. Its complementary DIL clause protects the multinational when the claim occurs in a country where the local policy limits are exhausted, and will apply where the master policy maintains higher limits.
DIC/DIL clauses stipulate the protocol for claims resolution if the insurer is not licensed or permitted to make payment in the jurisdiction where the loss occurred. Risk managers should understand how and where complex claims can be paid as non-compliance with specific country requirements can carry serious consequences, including fines, penalties and tax issues for the multinational company.
Chubb claims data analysis from 2018-2019 shows that DIC/DIL claims were triggered across casualty, property and specialty lines. DIC/DIL clauses accounted for 30% of product liability cases and nearly 20% of general liability and commercial automobile liability claims, respectively. Approximately 18% of multinational claims events impacted a company’s professional management liability policies.
In some jurisdictions, DIC/DIL clauses cannot respond to a claim. Therefore, the multinational’s insurer cannot indemnify the company’s foreign operations for financial loss. Risk managers should consider enhancing protection embodied in the master program with a policy endorsement, financial interest (FI) coverage, to address potential loss occurring in a restrictive foreign country.
FI is a sophisticated insurance tool for multinationals seeking protection for its foreign insureds. A foreign insured is a subsidiary or entity of the parent company that is domiciled in a country other than the United States, yet the country does not permit the purchase of insurance from an insurer that is not locally authorized in that country. The FI endorsement offers protection under the master policy by providing cover for the financial interests of the multinational arising from a foreign loss sustained by a subsidiary or the loss occurred in a restrictive country where it has a financial interest.
As an example, consider a UK master policy providing DIC/DIL commercial property coverage over a locally issued policy for the multinational’s operations in Brazil. If a loss occurs in São Paulo, and the claim is not covered or the limit is exhausted under the terms of the local policy, what is the intended result? While coverage under the master policy may respond, direct local payment from the master policy may not be possible in jurisdictions such as Brazil. Under this scenario, coverage for the loss occurrence in Brazil may, therefore, be problematic without the FI endorsement on the UK master policy where the payment can be made to the parent in the UK under the FI clause.
Multinational risk managers should think globally with the confidence to be able to act locally for inclusive insurance protection. Multinational risk management teams are advised to collaborate with a global insurer that has a network of licensed insurers worldwide that can issue admitted local coverage in countries or regions where the company operates, supported by local professionals knowledgeable of jurisdictional insurance rules and regulations. Proven expertise for assurance of coverage compliance with in-country mandates surrounding claims handling and payments of a foreign loss should be bolstered by the multinational insurance carrier’s network of licensed adjusters and claims personnel to ensure timely, efficient response.