Cross-border risks: Time for action

Europe's risk managers are becoming increasingly frustrated about the apparent inability of their core risk transfer partners to overcome local regulatory and fiscal problems in emerging markets and help them find robust solutions to their increasingly complex international risk transfer needs. Commercial Risk Europe's annual Risk Frontiers survey of leading European risk managers from 11 different countries (to be published in full shortly) has found rising levels of exasperation among risk and insurance managers about the absence of answers to the difficult questions as they seek to manage and transfer their global exposures. The customers understand that the local insurance supervisors and tax offices in the territories into which they are expanding are all too often vague, driven by protectionism and at times self-contradictory. This, the insurance buyers concede, makes it difficult for the insurers and brokers to provide neat and easy solutions to their problems.hideBut at the same time the risk and insurance managers find it perplexing that the insurers and brokers often do not even seem to be able to agree internally what the rules mean and what needs to be done about them, let alone find the basis for a market consensus. This is presumably why there appears to be rising market-wide support for the Airmic and Ferma initiative to build a global database of rules that is accessible to all risk managers to try and build a foundation of commonly accepted knowledge, even if many individual risk managers remain sceptical about its chances of success. Nicola Harvey, Risk Manager of Christie's, the UK-based international auction house and former head of Airmic, summed up the overall feeling among Europe's risk managers neatly on the whole topic when she said: "I just wish that the insurance industry would get their act together because it is so frustrating that there is disagreement and lack of clarity. The legislation is unclear and the authorities do not give clear answers." Before delving into what needs to be done to fix the problems with international coverages it is, however, worth reviewing why demand for the service has risen so much in recent times, why it has become such a hot topic and why we have decided to launch IPN. The risk managers who took part in this year's Risk Frontiers survey concluded that cross-border coverages and global programmes have become so much more important because European and international companies are so desperate to expand and bolster revenues and profits that risks are often overlooked. This leaves the risk manager in a position where she or he has to play catch up all too often and their risk transfer partners are therefore unable to meet their needs in the time required. Nicholas Bailey, Group Risk Manager of BBA Aviation, the London-headquartered flight support services and aviation aftermarket service provider, and this year's chairman of Airmic, said that when companies expand into new territories the local managers and even headquarters just assume that the risk manager will be able to buy the same kind of coverage in that market as at home and just as easily. "But of course this is not the case and in some parts of the world you just cannot secure the coverage. You can find that companies go ahead with such expansion without any cover and have assets and liabilities in place that are not insured because local management got ahead of themselves before thinking of the liabilities. Therefore trying to grow the business organically is a challenge as it is trying to grow by M&A of course, as anyone who has worked in that environment will attest," he said. Inevitably the growth markets that European and international companies are keen to target are the most complex and challenging. This is because so often the local regulators are trying to protect the local insurance market while at the same time generate foreign tax and other revenues, apart from the broader challenges of working in maturing markets. Creighton Twiggs, Group Risk Manager of Clariant International, the Basel, Switzerland-based manufacturer of colours, surface effects and performance chemicals, said: "They tend to be not consistently regulated but highly regulated and there are hidden additional costs to providing consistent insurance in, for example, China or India. In China you need a policy for each canton for example. In these places and Latin America it is difficult to find adequate limits locally and ensure that you have the coverage in place in a compliant way," he explained. To try and cope with this scenario and plug gaps, risk managers need global policies with local policies and can use DIL (difference in limits) and DIC (difference in conditions), said Mr Twiggs. "Excess layers risk creating tax exposures which is an added complication. Local compliance can appear overly-complicated and at odds with group policy," he added. Sabrina Hartusch, Global Head of Insurance at Triumph International, the global lingerie company, agreed and added that risk managers have to be prepared to deal with 'local behaviours and knowledge'. A more basic and direct challenge that European and international risk managers face when they try to deal with their company's expansion into exciting new markets is the hunger for fresh and more importantly, externally provided, tax revenues. Mr Bailey said: "They [tax authorities] just want tax dollars and it is a potential opening for more tax revenue. The bottom line is that if you are a global corporation or even only have operations in one or two other territories you have to be as compliant as possible. No one is perfect and the rules are often confusing and unclear but the tax authorities are interested and so you have to do your utmost to be as compliant as possible. The proposed (Airmic/Ferma) database will take us a long way along this journey," he said. David Howells of Tetra Laval, the international packaging firm based in Switzerland, said: "What is new is the speed at which situations change in different countries, all the time! Developing countries want to protect their fledgling insurance industries." Allen Lima, CRO at EDP, the Portuguese electricity provider, explained that his company has a policy to try and make centralised purchases so that it can achieve better prices thanks to higher volumes and this works in Europe. But Brazil is a different kettle of fish, he said. "In the case of Brazil this is just not possible to do. The market remains closed there, so our Brazilian unit purchases insurance locally," he said. And the rules that can complicate efforts to create seamless and cost-effective international insurance programmes are not just national protectionist efforts. Regional and international trade rules can also cause headaches when trying to put together the perfect solution, according to Nikolai Ivanov, Risk Manager at Polyus, Russia's biggest gold producer. "We had some problems with the export of raw materials as a result of certain regulations adopted by the European Commission. These regulations claimed that nickel is toxic. So there was a ban placed on exporting it without the appropriate certificates. This was one kind of stumbling block. This meant we had to change our export destination from Europe to Asia. Countries like China or Japan do not have these kinds of restrictions," he said. Add to this the headaches caused by sanctions imposed by international bodies such as the EC and the complications they can cause for insurance coverage, and the challenges that face today's multinational risk managers are crystal clear. So what are the insurers and brokers doing to try to meet the evolving demands of their customers, remove some of the frustrations and provide the level of comfort that their multinational customers so evidently desire? It is an irrefutable fact that the big international insurers and those regional insurers with aspirations to win and support the big ticket multinational accounts have put a lot of time, effort and money into trying to meet their customers' needs in this complex area in recent times. But, according to the risk managers who took part in this year's survey, unfortunately there is much more that needs to be done. During the Netherlands roundtable we focused this question on the brokers. Tjerk van Dijk of Fokker/Stork in the Netherlands reckoned that, for the standard exposures such as property and liability in a cross-border environment, it is fairly easy to control and manage international exposures. He said, however, that once a risk manager encounters the more complicated exposures, such as motor or aviation liability, they often find that their broker's network is not always able to provide the guidance or information needed. "When you get to the more complicated insurable risks it is very difficult to communicate those through the network of the broker," he said. Eric Bloem, insurance chief with Dutch brewing giant Heineken, said that he believes that all multinationals must face the fact that the footprint of the global programme does not match the footprint of the broker or other service suppliers. "Even if it does, not every local office delivers the same quality that you expect," he said. Jacqueline Plessius of TNT Express said that this is 'logical' because this kind of complex international area is dependent upon people. "In one country they do a great job and in another they do not," she said. Mr Bloem was asked how a risk manager should deal with such inconsistency. "Fight and fight," he said. "It is a never ending story but that is not a reason to complain because that is how the world works. I do not believe that my company's network is performing 100% across the world," continued Mr Bloem, very fairly. One of the problems picked up by the risk managers during the Swiss roundtable in Zurich is localism and the innate desire to protect your home turf, a tendency that is equally applicable to risk managers, brokers and insurers. Bruno Laenzlinger, Country Manager for project sponsor XL in Switzerland, said that, even in today's world, if a company wants to set up a new global programme built on local policies they have to work with global and sophisticated brokers and they have to help the risk manager fight for control. David Howells, Director Group Risk Management & Insurance at global packaging firm Tetra Laval, said, however, that he is not sure if it has to be a fight between local and central control in this day and age. "Is everyone really still trying to build their own kingdom so that only he or she has control? Surely the local manager will pick his battles and then challenge. It is about how you demonstrate and express the value of global programmes," he said. Philippe Guerry, Director, MF Risk Services, the insurance arm of retail company Groupe Maus Freres, pointed out that global programmes are a complex challenge for all parties. "When we say there is a big advantage to global programmes because they offer cost savings at the head office, consistency and clarity, the question comes from Brazil, whose advantage is it? What's in it for me? You have to have local and central advantages. "If there are only central advantages then the local guy will just say: 'No'. In the retail business there are a lot of small risks. If you have a shop in Brazil and it is already insured locally, it is difficult to justify it joining the global programme. In my experience it does not need to. Don't be a fanatic of global programmes, keep flexible and pragmatic. You can wait for the big risks, like a logistical centre." Mr Guerry said that insurers are trying to impose standards worldwide, which is fine. But, he pointed out that the local broker will ask: 'Who's my client?' "If the answer is the local CFO then he will fight for him. If you can explain to him that the risk manager at the head office is also his client, then he will keep both interests in mind. You have to set the right incentives for everybody involved," said Mr Guerry. Filipe Gomes of project co-sponsor Willis said that more and more insurers say they need to carry out separate underwriting and produce separate policies to the global programme. He added that there is a trend towards more decentralisation or a coordinated approach. "The other thing is that the goal is to have local best practice for local wordings and when you have a centralised programme with an integrated approach, you have to make sure that the insurer is issuing the coverage in accordance to local needs. The insurer will always tend to have a local coverage that is not providing broader coverage than the master. In addition the insurer will also try to keep limits locally at a low level, knowing that the total exposed limit may increase to a higher limit than foreseen for the whole programme, because local legislation may not consider an aggregation of limits. As we know DIC and DIL does not apply in many countries, therefore the local programme policies are important and need to cover the local risks adequately," he said. This is all very sensible stuff. But the basic question remains: Is the response from the insurers and brokers good enough? The answer sadly all too often in this year's survey was: 'No. Could do better', just like all those old school reports you nervously carried home to your parents at the end of the school year. Nicholas Bailey of BBA summed up the general feeling neatly as he said: "The fact remains that we have individuals even within the same insurance companies who do not agree on how the rules apply in territories and whether it can be written from London or elsewhere." So what is the solution? It seems we could happily drone on about the problems with international programmes and shortcomings of the insurers and brokers forever and much fun could be had in the process. But surely there has to be a solution to this conundrum? One solution, perhaps the only one that is not really a sales effort poorly dressed up as a wider philanthropic contribution to the corporate wheel, is the attempt by Airmic and Ferma, along with the London International Insurance Brokers' Association (LIIBA), to create a global database on insurance rules to at least provide a solid and consistent base to work from. Helen Hayden, Group Insurance Risk Manager of Prudential, has led the effort and she, thankfully, reported progress in an interview at the annual Airmic conference in Liverpool. She said that the project now has the backing of three of the biggest brokers. "We have had to spend time working out the model and the structure which is the boring behind the scenes part but fundamental to the success of the project. It has taken us a long time to get to this position but I am confident that we will have something in place to assist risk managers," she said. Mr Bailey said that the database is an 'excellent initiative' and it would be 'nice' to have. "Whether we make it or not is a question because it is a highly complex area," he said, stressing that it is vital that the effort is continued. "At the end of the day London is the centre of the global insurance marketplace and we need to get a handle on this and provide the best possible solution for risk managers to retain our global dominance. At the very least we need to be able to say that we did the best that we possibly could," continued Mr Bailey. Ian Thomson, Vice President, Insurance and Risk Management Centre of Excellence, at pharmaceuticals group GSK, said that he 'strongly' welcomes the concept so that all risk managers can 'minimise our exposure to non-compliance events and fines'. Julia Graham of DLA Piper, Vice President of Ferma and former Chairman of Airmic, said: "I'll state the obvious: The market should work together to pool knowledge, avoid duplication and ensure consistency in interpretation." This ground-up database effort is a laudable attempt by the risk management community to find a solution to a big problem in the absence of acceptable solutions from elsewhere. The insurers, brokers and other experts are having to support the initiative for no other reason than they risk upsetting their customers if they refuse to play ball. Many risk managers believe that the insurers and brokers quite like the confusion caused by the patchwork quilt of global insurance and fiscal rules that apply to global programmes because it justifies their fees and commissions and generates extra work of course. It is perhaps for this reason alone that it is surely incumbent upon the regulators themselves to take this area seriously and work together on a regional and international level to help out the very policyholders that they are designed to protect. To date we have neither seen nor hear anything from the regulatory community on the prospects for a more joined-up approach to cross-border insurance regulation and this is a shame. IPN will make one of its core goals to keep asking the questions and pushing the regulators for answers and thereby perhaps will play a small but potentially significant role in the endless search for a solution. Watch this space!

Cross-border risks: Time for action

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