Conflict between head office and local operations: top ten solutions

A global programme needs to resolve a number of areas of conflict resulting from the different requirements of head office and local operations, before it can be successfully implemented. There are however solutions to many of the areas of conflict and compromises that can be acceptable to both sides.

1. Price competitiveness
In order to avoid complaints from local operations about the programme increasing costs, it is vital that the programme ensures price competitiveness with the local insurance market. This will have to take into account possible long relationships with local insurers, and deliberate rate-cutting by local insurers to retain the business. The multinational programme should be able to achieve price competitiveness with the local market, given its bulk buying power.

2. Additional covers and higher limits
One of the benefits of a multinational programme is that it provides greater coverage in terms of limits and policy wordings than the local market can provide. This is particularly important in winning over the local operations to the programme. The benefits of having wider cover, higher limits, and better terms and conditions must be impressed upon the local managers. This is especially true where the local market is able to undercut the premium rate of the programme, and the improved cover will help to justify the greater premium spend.

3. Long-term stability
Where there is a long-term agreement between a local insurer and a local operation, there is little that can be done until the agreement period is over, and these operations will simply have to remain outside the scope of the programme until such time as the agreement is over and they can be included.

However, the long-term nature of multinational insurance programmes is one of the great benefits, and any long term arrangements that a subsidiary may have, and be required to give up, will be compensated for by the long-term nature of the programme. The success or failure of a programme may come down to the relationship between the multinational and the multinational insurer, and there are clear benefits for both in looking at the relationship over a long period.

4. Local compliance
Although it is not unheard for multinationals to ignore local laws and regulations, particularly with regard to the use of non-admitted insurance, it is not in the best interests of the group as a whole, and certainly not for the local operations. Local compliance is therefore a vital element that must be integrated into the multinational programme.

5. Central broker working with local brokers
Local compliance is just one reason for ensuring that local brokers and the programme’s central broker work together. In many territories, it is the local broker that has the market knowledge in terms of compliance, compulsory insurances, tariffs and the like.

The central broker needs to coordinate the programme with the local brokers in different territories and ensure that everyone is aware of how the programme operates and their role within it. At the same time, the central broker has to establish control over its foreign operations and the local brokers to ensure that the programme retains central control.

6. Balancing tax requirements
The programme needs to find the balance between the different tax requirements so as to ensure the best outcome for the group as a whole. However, this may to a certain extent be dictated by the local regulations concerning non-admitted insurance, and the local level of premium tax.

There may be a desire to avoid premium taxes where they are especially high in some countries. However, if the solution is to use non-admitted insurance, the buyer must check whether non-admitted insurance is allowed. If it is, it may be subject to premium tax and possibly at a much greater level.

If non-admitted is prohibited, there may be problems with premium allocation and claims payments. Even where the premium is allocated in the form of a management charge, there may be problems with the authorities and tax deductibility will be unlikely. Claims payments will often be treated as unearned income and taxed as such.

Therefore, any benefits gained from avoiding premium tax may be outweighed by other tax considerations, especially where the premium tax is relatively low. At the same time, other charges such as excise tax, stamp duty, VAT and fire service taxes must also be taken into account.

7. Fair and just premium allocation
Subsidiaries will pay particular attention to the level of premium allocation and judge it against what they could have achieved in the local market. This must be taken into account, even to the point of acknowledging the market rate and allowing insurance in the local market.

Premium allocation therefore must be seen to be made on the basis of a fair and just system, whether that be loss experience, implementation of loss control measures, exposure, or size of risk. The method of allocation must be fully explained to the various subsidiaries.

8. Realistic retentions
Just as the premium allocation has to be seen to be fair, so too the retentions must be considered reasonable. Again, the factors will include exposure, loss experience, loss control etc, but the retention level set for each subsidiary must be realistic and within the means of the subsidiary and not adversely impact upon profit.

9. Benefits of loss prevention
Risk management and loss prevention are ideas that may not be totally understood or recognised in all territories. However, the benefits can be illustrated simply; and in a multinational programme, such measures should be rewarded instantly through lower premiums – something that is often not achievable with local insurance markets.

10. Programme design
One solution to the problem of internal politics and disagreements between head office and subsidiaries is to adopt a combined programme. Under such a programme, the local operations are able to purchase local cover either for the compulsory covers, or for the broadest possible cover available in the local market. This allows full local compliance and retains local relationships and premium savings. The local cover is then supplemented with centrally arranged DIC/DIL cover under a master programme, which provides uniformity of cover, fills any gaps in cover and provides an element of central control.

Alternatively, the programme can use a global insurer with local admitted offices, which fulfils all the central requirements and satisfies many of the local requirements such as compliance, but does mean that local operations must insure with the multinational insurer’s local subsidiary, rather than the local admitted insurer of choice.