Financial interest cover now accepted as legal alternative by market says Zurich’s Strnad

"I think the acceptance of financial interest clauses is increasing, but really it increased a long time ago. I am not saying everybody loves the idea but it is recognised as the only real alternative for multinationals looking to take care of risk in countries that prohibit non-admitted insurance and DIC/DIL polices. I am waiting for the day that somebody shows me another solution, but for now financial interest cover is the only way to get an indemnification for a corporate customer in certain instances," said Mr Strnad. Financial interest cover protects the parent company against losses to its balance sheet as a result of incidents that arise from subsidiaries around the world. The risk is deemed to be in the country in which the parent company operates rather than the subsidiary. This removes some of the issues with non-compliant global programmes. There has been debate about the legality and efficacy of financial interest clauses. But Mr Strnad, a lawyer by trade, believes they are now accepted by the market as a legal and alternative global programme insurance solution.hide"Covering a financial loss via a financial interest clause is now accepted within the legal broking and insurer community. My take is that those people in the market that are engaged with this and involved in day-to-day matters accept this type of cover and are onboard with it," said Mr Strand. Zurich said that on programme structures where it leads the risk or co-insures and issues paper directly, all of the insurer's major international programme customers now have financial interest cover in place. For smaller customers this figures falls to under half. Mr Strand concedes there are still problems about getting the loss paid into the country in which a subsidiary is located, but said the recoveries provided by financial interest cover for the parent company are 'better than nothing'. To cover exposures in countries that prohibit the use of non-admitted insurance and, as is often the case, DIC/DIL to cover gaps between local and master policy limits, multinationals have three options, said Mr Strnad. An insured can ignore the rules and buy DIC/DIL cover-which runs the risk that the coverage will be void in prohibiting countries -or chose not to insure the gap between a local and master policy limit. "These are not suitable for the customer and are not viable options, " said Mr Strnad. The third, and only real, option is financial interest cover, he said. "The only sustainable way we see as a solution is to find another insurable interest. If you look at it logically, if there is a subsidiary in country x that remains uninsured for DIC/DIL and a loss really goes through the roof of the local policy, the local subsidiary will remain uninsured for that amount," said Mr Strnad. "But if you can then look at the value of the local subsidiary, and if you rightfully can say it has diminished because it has suffered an uncovered loss, you can look at the diminished value which that subsidiary presents itself on the parent company's-i.e. the insured's-balance sheet. In as far as the value of that subsidiary has gone down as an item on the balance sheet of the customers' home office you can prove that the parent company has an insurable financial loss. This is why financial interest cover works," he said. However, he was keen to point out that financial interest cover doesn't work very well, or even at all, for D&O risks. This is because directors and officers at overseas subsidiaries cannot be classified as an item on a group's balance sheet. "If you look at side A of D&O you cannot say that a director or officer working in country x is an item on the balance sheet of the corporate customer. So you cannot construe that structure with that insurable interest. In that instance solutions can only really be found where the insured is allowed or willing to indemnify the director or officer and the insurer can indemnify for such payment, by raising local policy limits," said Mr Strnad. He pointed out that in most countries across the world getting suitable D&O local policy limits is achievable because the sums at risk are often relatively low. "In most countries you don't get really big D&O losses or lawsuits so you can take care of the risk with an adequate local policy. So I will always advise clients to take out a local D&O policy, considering the history of rendered awards in any certain industry or market and taking the likely amount of losses in that area or country into account," he said.

Financial interest cover now accepted as legal alternative by market says Zurich’s Strnad

Want to read this article?

Read Next

Costs rapidly rising for employee health insurance in Portugal

UK market must innovate, not exclude emerging risks: BIBA

EC probes Meta for alleged breaches of Digital Services Act

AM Best improves outlook for Spanish market as talks underway to boost nat cat scheme

Survey suggests risk management losing gains made since pandemic

Costs rapidly rising for employee health insurance in Portugal

UK market must innovate, not exclude emerging risks: BIBA

EC probes Meta for alleged breaches of Digital Services Act

AM Best improves outlook for Spanish market as talks underway to boost nat cat scheme

Survey suggests risk management losing gains made since pandemic

Want to read this article?

Read Next

Costs rapidly rising for employee health insurance in Portugal

UK market must innovate, not exclude emerging risks: BIBA

EC probes Meta for alleged breaches of Digital Services Act

AM Best improves outlook for Spanish market as talks underway to boost nat cat scheme

Survey suggests risk management losing gains made since pandemic

Related Articles