Parima conference: Global programme growth in Asia relies on broker experience

Implementing an international insurance programme without the help of an experienced global broker would be suicide, according to risk managers.

Global programmes were the subject of the opening session of the Pan-Asia Risk and Insurance Managers Association (Parima) annual conference in Hong Kong.

International carriers have been heavily promoting the use of global programmes to Asian corporations, many of which still insure their various holdings on a country-by-country basis.

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However, there is increasing interest among Asian risk managers in exploring the feasibility of an international programme. The recently published Risk Frontiers Asia survey revealed that just under half (47%) of risk managers currently use a global programme, while a further 15% are planning to do so.

But while international programmes offer cost savings and operational efficiencies if implemented correctly, there are several challenges around regulation, taxation and customer service that have to be managed.

And this is where brokers can earn their worth. Asia has proved to be challenging market for many international brokers. Local brokers have a very sticky relationship with their clients, who are likely to show loyalty. Meanwhile, international brokers are engaged in a land grab that is driving down fees to gain market share.

Yet in the context of an international programme, most risk managers will look to an international broker to act as their external risk manager, smoothing over any gaps in coverage that may emerge, ensuring compliance in all the territories covered by the programme and knitting the whole policy together.

One of the biggest challenges when implementing a global programme is ensuring compliance in all of the different territories covered by the policy, especially among Asian countries where there is such a varied regulatory landscape.

Some territories disallow some insurance services and activities, from non-admitted policies to loss adjustment. And there are even more prohibitions when the policy is written in another territory. For insurers, there is little value in covering a foreign risk if you cannot adjust a loss, pay a claim or conduct certain risk engineering activity.

The difference in insurance rules among different regions is more of an issue in Asia than it is in many other international markets. In the European Union (EU), the Freedom of Services rule, where one EU-based office can service companies in any other EU state, is a key component in international programmes.

Such an approach saves on administrative costs but it does also raise some servicing issues for local subsidiaries, especially in a high claims environment. For example, would a German subsidiary of a UK company be happy if they were constantly dealing with a UK-based office whenever there is claim?

Ultimately, it comes down to the servicing of the subsidiaries. International programmes may be better suited to low frequency and high severity claims rather than the high frequency low severity claims. It is a discussion that every company considering an international programme must have, said Fernando Denes, head of international sales and distribution, Zurich Global Corporate Asia-Pacific.

Aside from compliance, there are other aspects that need to be clarified before implementing a global programme, said Mr Denes. “How would it pay an international claim? Is there adequate cover in each territory? Are there efficient and quality services in all territories where policies are issued? Is there consistent wording?”

Making adjustments to the numbers, the pricing and the deductibles is relatively straightforward, but changing the wording of an international programme is much more complex and, if not managed correctly, can have huge implications in terms of claims.

There is also the challenge of getting the insurer to make the necessary changes. As one risk manager complained: “A lot of the products are off the shelf, so the wording is already decided. And the brokers are stretched very thinly as it is, so you are unlikely to find the manpower to help you implement these changes.

“The brokers could certainly do more to help on changing the wording. Instead we have to go through it, point it out to the broker, but it gets left and then they say ‘we have no time’ and nothing gets done and nothing changes. The devil is in the details.”

Another challenge with global programmes is the conflict between global and local needs. There are different cultures and philosophies involved in managing risks and making claims in different regions. Some prefer to retain losses while others look to claim for everything.

There are also different approaches to insurance adopted by different subsidiaries. A corporate may have a group philosophy of minimum retentions but local offices may have a different philosophy where they transfer all risks to the insurers, which also increases broker fees.

In such instances, corporates must make a decision. “You either have them included in your global programme and educate them in how it will be run, an exercise that should be led by the global CFO,” said Mr Denes. “Or else you allow them to leave the global programme and to buy their own insurance.”

When you are mixing a global programme with the use of local policies in certain instances, it can create a risk of coverage gaps. For example, the local policy may not be issued – either due to the local insurer having a backlog, the broker receiving conflicting instructions from the client, or the client not delivering the required documentation.

Or even when a local policy is issued, the traditional lag in receiving the policy document and the lack in contract certainty becomes even more pronounced. Insurers may claim that conformation of coverage should be enough to grant contract certainty but what happens if the company tries to make a claim before it has received its policy document in writing?

As highlighted by Jose Ribeiro, managing director, Asia-Pacific for ratings agency AM Best, there are some countries such as Nigeria where the regulators dictate that insurers operate on a ‘cash before cover’ basis and the insurers’ accounts departments will not pay out until they see a contract.

Meanwhile in Malaysia, the regulator will not approve an insurance policy issued from another jurisdiction until an exchange rate is agreed for the two respective currencies in respect to the premium payments. This can not only lead to a delay in implementation, it can also increase premiums if there are currency fluctuations or extra tariffs on cross-border transactions to take into account, as is the case in Indonesia.

There are also some challenges when it comes to issuing payments in certain countries. India, Australia, Thailand and Indonesia all have issues in this regard, meaning that payment may have to be issued in the country where the master policy is based. This can create tax implications.

This is an area where the broker, especially a global broker, can add real value, say risk managers.

This conflict between local subsidiaries and the global headquarters is especially acute for companies that grow, either organically or through acquisition. With organic growth, companies often become multi-dimensional and this can create more diversity in the culture and philosophy of the organisation. Similarly, any companies that are acquired and then integrated into a global programme can create problems for a risk manager at the outset.

So how do you maintain control in a global programme without making your regional subsidiaries uncomfortable? “These are all problems that can be managed but not necessarily eliminated, said Mr Denes. “Risk managers have to challenge their brokers and insurers and ask how an international programme would manage all of these issues.

For example, will the policy be issued in 30 days? If so, how? And can it be modified and customised?”

Sometimes it makes sense to keep some countries out of an international programme and to keep all the ‘good’ risks in one pot, said Kai Wolf, senior risk analyst for Qatar Sports Authority.

There is not a one-size-fits-all solution, nor is there a global programme that will cater for every single subsidiary. “Issuing separate local policies in these counties means less administration, fewer headaches and probably the same price as an international programme. You pay a little more in premium but you have less administration and travel to worry about.”

Mr Wolf also stressed that the role of a competent, international broker is crucial. “Without an experienced, global broker on your side, it is suicidal to embark on an international programme. There is simply too much implementation and transition risk involved and you cannot do it without one. Large corporations often have different local brokers for each policy. You should have one global broker who has the reach and the experience to oversee the implementation of the plan. It is worth paying the fee for the certainty if something goes wrong.”

But few things are ever straightforward in the world of international programmes and even paying the fee can cause issues. Brokers generally prefer to be paid by commission, whereas clients will typically pay fees. This complication can be eased by subtracting one from the other and coming up with a final sum that all parties are happy with.

This issue and any other complications with brokers should be made easier by the fact that they, like insurers, have a growing appetite for global programmes because of the cross-selling opportunities they create, especially in employee benefits which brokers are keen to merge with general insurance.