Rajika Bhasin, associate general counsel, AIG multinational, and Lisa Boon, marine multinational lead at AIG, discuss the issue of multinational marine limit management.
What is limit accumulation?
Rajika Bhasin (RB): The issuance of multiple policies to related insureds within a client’s multinational programme increases the likelihood of:
- Occurrence policy limit accumulation – more than one policy within the programme responds to the same occurrence, resulting in claim payments above the contemplated programme occurrence limit
- Aggregate policy limit accumulation – occurrences triggering coverage continue to occur after the programme aggregate limit has been exhausted, resulting in claim payments above the contemplated programme aggregate limit.
Careful attention should therefore be paid to the limits across the master and/or local policies* that may be triggered by the same or related events across a multinational programme.
The programme should support, and not exceed, the policy limit exposure contemplated on both an occurrence and aggregate basis.
How does AIG manage policy limit exposure for multinational programmes?
RB: The most common approach is through (1) programme structure, (2) shared limit provisions, (3) indemnity provisions, (4) indemnity agreements, and/or a combination or other variation.
For example, the programme may be structured to locally exclude or offer reduced local limits for perils likely to impact multiple countries (and trigger multiple policies).
The quote, binder, master policy and/or local policies may include provisions to describe the shared nature of limits in the programme, and specify that each policy limit is part of, not in addition to, the agreed programme limit, and payments under one policy will reduce the limits under other policies. These provisions are often referred to as ‘anti-stacking’, ‘tie-in’, or ‘interlocking’ clauses, and are often combined with other provisions to require indemnification of the master policy insurer from the client for amounts paid in excess of the agreed programme limit.
Alternatively, a separate indemnity agreement may be used to require indemnification from the client for amounts paid in excess of the agreed programme limit.
What about Freedom of Service placements within a multinational programme?
RB: European Union (EU) law permits insurers licensed in an EU member state to cover risks across the European Economic Area under a single policy on a Freedom of Services (FOS) basis.
FOS by its nature implicates coverage for the same or similar risks across multiple jurisdictions and increases the likelihood of limit accumulation.
When contemplating FOS coverage, either within the master or local policy, it’s important to ensure all parties understand how the policy limit exposure will be managed on both an occurrence and aggregate basis, and how this may impact certificates of insurance, servicing and payment under the FOS placement.
Why is this relevant to marine?
Lisa Boon (LB): It’s important to remember that marine policies by their nature are primarily global in scope, as they typically cover goods in transit to and from different countries. This was reinforced in part by common exceptions to requirements for locally-admitted insurance for marine business.
A global rise in systemic events, coupled with increasingly agile markets and an ongoing trend towards protectionist regulations, has resulted in clients more frequently including local marine policies to more adequately protect local exposures and operations. The number of local marine policies issued by AIG during the past five years has nearly doubled.
Is anything changing for new and renewing marine programmes?
LB: The recent confluence of these factors has increased the need for stakeholder alignment on the intended programme limit(s), rights and obligations in case of payment in excess of the agreed programme limit. Thus, with this increased demand, it is equally important that the capacity deployed is clearly defined and understood among all parties within the multinational programme. This is particularly true with coverages that are provided on a per-occurrence or aggregate basis.
An example would be within a stock throughput programme where a limit for earthquake is provided on a per-occurrence basis and in the annual aggregate. As such, if an event occurs in Japan exhausting all the earthquake capacity deployed via the master and/or local Japan policy, there is no more earthquake limit available under the master policy or any of the other local policies for the remainder of the policy term.
The purpose of the anti-stacking language in both the master and local polices is to provide clarity on the capacity deployed in the global programmes quotes, binder and master policy.
What is the best way to manage policy limit exposure for multinational marine programmes?
LB: There is no one-size-fits-all solution and the best approach will be tailored to the risk presented by a particular account. For example, a separate indemnity agreement may be used to require indemnification where different insurers issue the master and local policies, or where no master policy (which would typically reflect the intended programme aggregate limit and include aggregation and indemnification provisions) exists.
Complex accounts providing high-limit, local coverage for systemic-prone covers may utilise shared limit provisions in the corresponding local policies to evidence the local insured’s alignment with the intended programme aggregate limit.
Regardless of the approach, the underwriter, broker and client should understand and agree upfront on how the policy limits apply and are intended to respond, and their rights and obligations in case of payment in excess of the agreed programme limit. Differences in interpretation following a major occurrence can create unintended financial consequences for all stakeholders.
*While these issues typically arise in the context of controlled master programmes, which combine a master policy with local policies coordinated through one insurance network, the considerations outlined here apply equally to other multinational programme structures, including standalone local policies with no corresponding master policy, etc.
Contributed by Rajika Bhasin, associate general counsel, AIG multinational, and Lisa Boon, marine multinational lead at AIG