Minimizing Risk The Role of International Insurance October 17, 2008 Norfolk, VA Marsh Inc.Marsh Inc. Matthew McDavidBruce Cohen 1051 East Cary Street, Suite 9001255 23rd St. NW, Suite 400 Richmond, VA 23219Washington, DC 20037 Office: - PowerPoint PPT Presentation

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Minimizing Risk The Role of International Insurance October 17, 2008 Norfolk, VA Marsh Inc.Marsh Inc. Matthew McDavidBruce Cohen 1051 East Cary Street, Suite 9001255 23rd St. NW, Suite 400 Richmond, VA 23219Washington, DC 20037 Office:

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Title: Minimizing Intl. Risk Author: Bruce Cohen Last modified by: bcohen00 Created Date: 2/18/2008 7:37:45 AM Document presentation format: Custom – PowerPoint PPT presentation

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Title: Minimizing Risk The Role of International Insurance October 17, 2008 Norfolk, VA Marsh Inc.Marsh Inc. Matthew McDavidBruce Cohen 1051 East Cary Street, Suite 9001255 23rd St. NW, Suite 400 Richmond, VA 23219Washington, DC 20037 Office:


1
Minimizing Risk The Role of International
Insurance October 17, 2008 Norfolk,
VA Marsh Inc. Marsh Inc. Matthew
McDavid Bruce Cohen 1051 East Cary Street, Suite
900 1255 23rd St. NW, Suite 400 Richmond, VA
23219 Washington, DC 20037 Office
(804)344-8975 Office (202)263-7889 Matthew.M.Mc
David_at_marsh.com Bruce.D.Cohen_at_marsh.com
2
Globalization of Risk Insurance Orientation
  • Causes of globalization
  • Insurance follows risk
  • Increased exposure to People, Assets, Earning,
    and Liabilities

Global risks are more far reaching and less
predictable
3
Risk are geographically diverse and intrinsic to
certain regions
A World of Risk
Market Conditions
IRB Privatization
Avian Flu
Currency Devaluation
4
Risk Insurance Issues for Multinationals Africa
Region
  • Increasingly difficult for multinational
    insurance buyers to gain an understanding of and
    keep abreast of African insurance markets
  • Constantly changing regulations
  • Pure fronting accepted in some countries, but
    others introduce restrictions
  • Nationalization and rigid rules a constant in
    many African insurance markets
  • Some countries now introducing privatization and
    liberalization plans

Need to keep abreast of market and regulatory
developments
5
Risk Insurance Issues for Multinationals Middle
East Region
  • Gulf States like Dubai, Bahrain, and Qatar
    emerging and attracting fresh capacity
  • Dubai now considered as rivaling the London, New
    York, and Bermuda insurance markets
  • On the other hand, pockets of protectionism, such
    as Saudi Arabia slowly opening up
  • Takaful
  • A mutualized insurance approach to risks that is
    in consonance with Islamic principles
  • Particularly useful to consider if you are in a
    joint venture with local partners
  • Marsh has identified some markets

Great contrasts and challenges
6
Risk Insurance Issues for Multinationals Europe
Region
  • Among the most important things to consider when
    looking at your European operations are
  • Are they in EU or non-EU Countries?
  • If in an EU member country, do not assume
    insurance markets or legal frameworks are
    identical in any two member countries
  • Emerging trends
  • Cooperation of European tax authorities
  • UK Manslaughter
  • Tort Reform
  • Move toward U.S. style of litigation
  • Private enforcement of rights
  • Class action lawsuits

Despite EUs move to harmonization, issues diverse
7
Insurance Issues for Multinationals Europe
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

8
Risk Insurance Issues for Multinationals Latin
America Region Market Conditions
  • Property rates competitive with the exception of
    critical catastrophe (CAT) areas
  • Increased focus on modeling throughout the region
  • Casualty
  • Limits relatively low in most countries
  • Marine cargo and hull and inland marine are a
    common coverage
  • Supply and competition are high
  • Workers compensation
  • Mainly government run in region (exception is
    Argentina)

Region is very diverse politically and
economically
9
Risk Insurance Issues for Multinationals Latin
America Region Trends
  • Insurance commissioners in most countries are
    more stringent
  • Insurer solvency margins, minimum capital
    requirements, and reinsurance security behind
    local insurers
  • Emerging trends
  • Directors officers liability
  • Financial institution coverages
  • Environmental liability
  • Professional indemnity
  • Trade credit
  • Product recall
  • Terrorism
  • Increase in complex claims and their settlement
  • High demand for private equity, merger and
    acquisition services

Modernization of insurance products
10
Risk Insurance Issues for Multinationals Asia-Pa
cific Region Trends
  • Country-by-country details vary greatly
  • Common insurance concerns include
  • With the exception of Hong Kong and Singapore,
    every country still requires admitted insurance
  • Japan still treats recovery under nonadmitted
    insurance as corporate income subject to income
    tax
  • Tariff rates are still a fact of life for some
    lines of insurance
  • Pure fronting is often not permitted
  • Mandatory cession between 10 and 20 has to be
    made to the government reinsurance company in
    some countries

Insurance activities remain highly regulated
11
Risk Insurance Issues for Multinationals Asia-Pa
cific Region Risk Issues
  • Natural disasters
  • Earthquakes, tsunamis, typhoons, and floods
  • Political risk, terrorism, social unrest
  • Potential to disrupt business operations and
    cause financial losses
  • Product safety and quality issues are widespread
  • Problem by no means limited to ChinaHong Kong,
    Taiwan, the Philippines, Vietnam and others have
    had recalls
  • Very soft market for most lines
  • More companies are buying admitted DO policies
  • 50 of multinational company subsidiaries in
    South Korea buy a local DO policy

Competitive market in a high risk area
12
Risk Insurance Issues for Multinationals Asia-Pa
cific Region China
  • Major Chinese insurers are beginning to develop
    appetite and expertise for participating in
    global property programs for multinational
    companies
  • Willing to write tough risks and accept very
    broad manuscript wording
  • For companies with significant total insured
    values in China, this can be a valuable
    opportunity to build additional panel
    diversification into the global program
  • At the same time, builds direct relationships
    with major insurers in China for local placements

Insurance is placed by province
13
Multinational Review of Current Marketplace and
Forecast
Median Rate Change at Renewal (Average/Good Risk Profile) Median Rate Change at Renewal (Average/Good Risk Profile) Median Rate Change at Renewal (Average/Good Risk Profile)
Segment Q4 2007 2008 Trend
Controlled Master Programs Controlled Master Programs Controlled Master Programs
Risk Transfer/Liability Flat to -20 No change Limited by min. premium requirements
International Fronting/Property/Casualty Flat to -10 No change Limited by min. premium requirements
Primary International Auto Flat to -20 No change Limited by min. premium requirements
International Package/Multiperil Flat No change Limited by min. premium requirements
Locally-Placed Property/Casualty Flat to -20 No change Limited by min. premium requirements
Locally-Placed Workers Comp/Employers Liability Flat to -10 No change Limited by min. premium requirements
14
Risk Insurance Issues for Multinationals Latin
America Region Brazilian Insurance Market Changes
  • Law privatizing Brazilian reinsurance market
    approved in January 2007
  • New law foresees three types of reinsurers
  • Local reinsurers registered and incorporated in
    Brazil
  • Admitted reinsurers registered abroad but with
    offices in Brazil
  • Non-admitted (occasional) reinsurers with
    registered offices abroad and no representative
    offices in Brazil
  • Gradual opening of market with insurers obliged
    to offer local reinsurers
  • 60 of reinsurance cessions for the first 3 years
  • 40 of reinsurance cessions from the 4th year
    onward
  • Privatization has taken a greater urgency

Privatization expected to be challenging,
implications significant
15
Risk Insurance Issues for Multinationals Asia-Pa
cific Region Avian Flu
  • Concern, unfortunately, is waning despite
    evidence that a pandemic is a real global risk
  • The regions governments are watching pandemic
    risk closely and have emergency response systems
    in place
  • Very low level of preparedness and limited
    resources and capabilities in the event of a
    pandemic among businesses and individuals
  • Companies must do a better job recognizing the
    risks associated with pandemics
  • Use tools such as business continuity planning
    and crisis management to minimize loss potential
    and resulting financial impact

Companies must do a better job in risk
identification
16
Risk Evaluation Global Check Up
17
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 firms total cost of risk globally
  • Increasing a companys confidence in its global
    insurance portfolio
  • Limiting a firms foreign exposure
  • Optimizing and sustaining a regulatory compliance
    processes
  • Reducing potential regulatory compliance costs

Increased confidence when risks are
identified, measured,
monitored, and managed
18
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

19
Global Check Up Alternative Program Structures
Pros Cons
Process
Cost
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 clients 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
20
Global Check Up Evaluation of Risk Financing
Options
21
Global Check Up Potential 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

22
Globalization of Risk Insurance Conclusion
  • Evaluating international risks helps ensure
    structural integrity of risk and insurance
    programs
  • Better protect a companys 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

23
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