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Globalization of Risk & Insurance Orientation
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  1. Minimizing RiskThe Role of International InsuranceOctober 17, 2008Norfolk, VAMarsh 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)

  2. Globalization of Risk & InsuranceOrientation • Causes of globalization • Insurance follows risk • Increased exposure to People, Assets, Earning, and Liabilities Global risks are more far reaching and less predictable

  3. Subsidiary A World of Risk Risk are geographically diverse and intrinsic to certain regions Market Conditions IRB Privatization Avian Flu Currency Devaluation

  4. 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

  5. Risk Evaluation“Global Check Up”

  6. 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

  7. 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

  8. Non-Admitted Fragmented A B C D E A B C D E Fragmented with a DIC DIC A B C D E DIC A B C D E Customized CMP DIC A B C D E Global Check UpAlternative Program Structures Pros & Cons Cost Process Options Coverage • All insurance is arranged centrally at the corporate level. • No underlying policies are issued; cover is “non-admitted” OUS • Premiums may be allocated internally. Min • Lowest direct cost. • Not compliant in most jurisdictions. • Raises potentially severe tax issues • No sharing of costs with partners. • 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. • 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. • Coverage is standardized, eliminating possible coverage gaps within and between individual policy territories. • DIC premiums may be allocated internally. • As above. • Adds some measure of uniformity, along with incremental cost. • DIC provides “non-admitted” coverage, raising possible legal and tax issues. • 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. • 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. Controlled Master Program (“CMP”) • As above. • Allows customization to the needs of operating units. • Can create potential cash flow and non-concurrency risk for a client’s captive. • 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. Max Aligning Product with Coverage & Cost

  9. Insured Program Local Retention Matching Deductible Captive Reinsurance Insurer Insurer Insurer Insurer Captive Retention Corporate Deductible Captive Retention • 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 Global Check UpEvaluation of Risk Financing Options

  10. 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

  11. 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