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Transcript of Www.marsh.com Minimizing Risk The Role of International Insurance October 17, 2008 Norfolk, VA Marsh...
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Minimizing RiskThe Role of International Insurance October 17, 2008Norfolk, VA
Marsh Inc. Marsh Inc.Matthew McDavid Bruce Cohen1051 East Cary Street, Suite 900 1255 23rd St. NW, Suite 400Richmond, VA 23219 Washington, DC 20037Office: (804)344-8975 Office: (202)[email protected] [email protected]
2Marsh
Globalization of Risk & InsuranceOrientation
Causes of globalization
Insurance follows risk
Increased exposure to People, Assets, Earning, and Liabilities
Damage or injury to third parties
Consequential financial loss not arising out of damage or injury
Operations at or away from premises
Sale of products & service
Operation of motor vehicles
Pollution
LiabilityVariables: cross-border operations and sales, various legal systems, tolling operations, travel
Economic value of lost sales or production
Extra expense to relocate production to another supplier/country
Operating dependencies within the organization and externally
Continued flow of raw material to and product from key manufacturing sites
Continued use of assets
Continued operations of customers
Health and safety of employees
Earnings StreamsVariables: threats to continued operations including physical loss or damage to assets, economic, civil or political unrest, pandemics, barriers to trade, etc.
Theft or non-payment
Physical loss, damage or destruction
Contamination, rejection
Political violence, physical loss or deprivation
At an owned, leased or rented location
At a third party location (supplier, customer, while on consignment, at a dealer location, etc.)
While rented or leased
While in transit or temporary storage
AssetsVariables: fixed assets, stock, accounts receivable, cash, valuable papers, media, intellectual property
Sickness, injury or death
Detention for ransom or political reasons
Loss of a key employee
At work or going to/from
While traveling to/from or working outside their home country
PeopleVariables: who is hired, nationality, where hired, where working or traveling, personal security, conflicting legal jurisdictions in case of injury/death, importance to the business
INSURABLE RISKEXPOSUREFOCUS
Damage or injury to third parties
Consequential financial loss not arising out of damage or injury
Operations at or away from premises
Sale of products & service
Operation of motor vehicles
Pollution
LiabilityVariables: cross-border operations and sales, various legal systems, tolling operations, travel
Economic value of lost sales or production
Extra expense to relocate production to another supplier/country
Operating dependencies within the organization and externally
Continued flow of raw material to and product from key manufacturing sites
Continued use of assets
Continued operations of customers
Health and safety of employees
Earnings StreamsVariables: threats to continued operations including physical loss or damage to assets, economic, civil or political unrest, pandemics, barriers to trade, etc.
Theft or non-payment
Physical loss, damage or destruction
Contamination, rejection
Political violence, physical loss or deprivation
At an owned, leased or rented location
At a third party location (supplier, customer, while on consignment, at a dealer location, etc.)
While rented or leased
While in transit or temporary storage
AssetsVariables: fixed assets, stock, accounts receivable, cash, valuable papers, media, intellectual property
Sickness, injury or death
Detention for ransom or political reasons
Loss of a key employee
At work or going to/from
While traveling to/from or working outside their home country
PeopleVariables: who is hired, nationality, where hired, where working or traveling, personal security, conflicting legal jurisdictions in case of injury/death, importance to the business
INSURABLE RISKEXPOSUREFOCUS
Global risks are more far reaching and less predictable
3Marsh
Subsidiary
A World of Risk
Risk are geographically diverse and intrinsic to certain regions
Market Conditions
IRB Privatization
Avian Flu
Currency Devaluation
7Marsh
Insurance Issues for MultinationalsEurope: Environmental Liability
The EU Environmental Liability Directive took effect April 30, 2007 – Each country responding differently– Requirements apply across all member countries
Adds to the former third-party liability that companies had for bodily injury and property damage
Only government authorities are entitled to claim for remediation or indemnification
Does not require any financial security or oblige insurance purchase– This will be looked at again in the near future
A few local and global markets exist for third and first party coverage for the new conditions, but this will usually be under an environmental program, not a general liability program
17Marsh
Global Check Up Risk Evaluation & Audit Goals
A systematic and comprehensive process to assist in the evaluation and treatment of global insurance and risk management programs
The goals of an audit should include:– Enhancing the quality of information needed for management
decision making on global insurance programs– Reducing a firm’s total cost of risk globally– Increasing a company’s confidence in its global insurance portfolio– Limiting a firm’s foreign exposure– Optimizing and sustaining a regulatory compliance processes– Reducing potential regulatory compliance costs
Increased confidence when risks are identified, measured, monitored, and managed
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Global Check Up Risk Evaluation & Audit Process
An audit process involves:– Analyzing compliance with local laws and customs– Reviewing exposures, risk quality, and loss experience by country– Identifying gaps in coverage or duplication– Eliminating redundant insurance purchases– Assessing financial security of all insurers in each country– Documenting all insurance policies in a central database– Identifying opportunities for centralized purchasing of insurance
and related services, including risk control– Highlighting broad socioeconomic and political threat issues– Reviewing processes, procedures, and communications protocols
for global risk management– Providing alternative program designs based on a review/analysis
outcome
19Marsh
Global Check UpAlternative Program Structures
Options Process Pros & Cons
Non-Admitted
A B C D E
Fragmented with a DIC
A B C D EDIC
Controlled MasterProgram (“CMP”)
A B C D EDIC
Customized CMP
A B C D EDIC
Fragmented
A B C D E
• Each operating unit buys insurance according to its own perceived needs.
• Compliance with insurance regulations is decentralized.
• Policy summaries are provided to whoever wants or needs to know.
• As above.• Coverage is standardized, eliminating possible
coverage gaps within and between individual policy territories.
• DIC premiums may be allocated internally.
• Insurance is negotiated and placed with an insurer using its international network to issue policies in each country as needed.
• Compliance with insurance regulations is centralized.
• Premiums are paid centrally or locally.
• As above.• Local policies may be broadened to meet
unique, local requirements for coverage or limits.
• Centrally-managed funding programs can be structured to bridge differences in risk retention or coverage.
• Best suited for a company with a hands-off, decentralized management style.
• The most expensive approach (“sum-of-its-parts”), with little quality control.
• Oriented to the interests and buying style of the individual operating or business unit.
• As above.• Adds some measure of uniformity, along with
incremental cost.• DIC provides “non-admitted” coverage, raising
possible legal and tax issues.
• The most cost-effective approach overall.• May be vulnerable to attack at a local level.• Requires buy-in at all levels and equitable
distribution of costs.• Some coverage is “non-admitted” or exposure
must be self-insured.
• As above.• Allows customization to the needs of operating
units.• Can create potential cash flow and non-
concurrency risk for a client’s captive.
• All insurance is arranged centrally at the corporate level.
• No underlying policies are issued; cover is “non-admitted” OUS
• Premiums may be allocated internally.
• Lowest direct cost.• Not compliant in most jurisdictions. • Raises potentially severe tax issues• No sharing of costs with partners.
CostCoverage
Max
Min
Aligning Product with Coverage & Cost
20Marsh
Global Check UpEvaluation of Risk Financing Options
Insurer
CaptiveRetention
Retention
InsurerInsurer
Insurer
CorporateDeductible
• Competitive market, especially OUS
• Best suited for low risk or compulsory lines
• Guaranteed cost• Loss sensitive options
available for casualty
• Could be lowest cost of risk transfer
• Greater autonomy in handling claims
• Requires acceptance by the foreign affiliates and stakeholders
• Can be combined with other options
• Not possible for compulsory lines
• Can minimize IPT• Premiums allocated
generally exclude funding for expected losses
• Claims absorbed corporately or allocated back internally
• Could be coupled with a captive indemnity policy
• Could be used to allocate non-program premiums (Excess Casualty, D&O, etc.)
• Common structure for clients with captives
• Premiums include funding for expected losses, using projections from the insurer or an actuary (or both)
• Can include aggregate loss protection
• Versatile, applying to a broad spectrum of property and casualty lines
Captive ReinsuranceLocal Retention Matching DeductibleInsured Program
Captive
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Global Check UpPotential Outcomes
A clearer picture of the global risks a company faces
Assist in market entry analysis
A look at the various options for managing them– Program structures and risk financing methods
Action plan to bring it all together
22Marsh
Globalization of Risk & InsuranceConclusion
Evaluating international risks helps ensure structural integrity of risk and insurance programs
Better protect a company’s People, Assets, Earnings, and Liabilities
New generation of risks in regulatory compliance
Sound technical risk management, market knowledge and planning will help find the upside in international risks