Questions of compliance–Michael Salzmann and Peter J. Schlumpf of HDI-Gerling Global Network

As globalisation of the economy has progressed, the requirements of our customers for their insurance cover have changed. This continually emerges from conversations with our customers and with risk managers and brokers. Customers generally define their requirements in respect of insurance cover for their entire group of companies. Their ideas take account of the risks affecting individual foreign locations, as well as the risks for the company as a whole.

Generally, it is important for the parent company to control insurance cover for all the foreign production and warehouse locations, sales units, construction projects and employees from the home country of the parent company. No risk manager would want to carry out a separate search for an insurer in each of the individual countries where the business activity of its group is carried out.

Such an approach would preclude synergy effects, central control of costs, insurance conditions and uniform claims settlement. Moreover, there would be the risk of gaps in cover. This is why globally positioned customers generally require international insurance solutions for their global network of risks – and they want that cover from a single souce and a single insurance company.

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Setting up solutions like this is easier said than done. Groups may often require international programmes for business premises in 30, 50 or more countries. An insurer needs to deal with a number of challenges when setting up a programme like this in order to be in a position to offer its customers seamless insurance cover in every country at all times.

Ultimately, the insurance cover is not intended to simply insure the risks of the companies in all these countries. The cover needs to simultaneously comply with all the local and international legal and statutory provisions in each individual territory.

Risk complexity increases

In view of the global network of production facilities and sales channels, the operational risks of multinational companies have grown increasingly complex over recent years. At the same time, it has become more difficult for parent companies and their insurers to retain an overview of supply chains that might be at risk or operations that could be in danger of being interrupted.

In 2011, the flooding catastrophe in Thailand provided a very clear demonstration of this. The curtailment of operations among suppliers in the country entailed a production shutdown in many other countries. The business interruption claims arising as a result of this disaster were huge. The companies themselves and their insurers were surprised by the massive extent of these losses. This event demonstrates the extent to which multi-dimensional and extremely complex risk situations have developed as a result of the global network of industrial companies.

Compliance requirements are everywhere

Alongside the increasing complexity of risks, the area of compliance is extremely important from the perspective of many group head offices. Our interpretation of the concept of compliance involves the totality of all the measures undertaken by a company to ensure that its conduct is in accordance with the statutory provisions and legal regulations. In a nutshell, a company needs to be a “good corporate citizen” in every territory where it is operating.

Adherence to both local and international legislation and statutory regulations is very important if the company is to avoid negative consequences such as fines and bans. Compliance regulations also exert an impact on insurance cover. Most risk managers we work with have a strong need for certainty that their risk concepts and their insurance products do not simply meet operational requirements. They also have to be compliant.

If they are to ensure the compliance of their insurance solution at all times, companies and their insurance partners need to meet a large number of different conditions. Let’s take just one example: insuring a production site located in Brazil from France, England or Germany is prohibited. Bans like this are known as prohibitions on non-admitted insurance and they apply in most countries. It means that an operational risk needs to be covered by a local policy. Only an insurer licensed in the individual country or territory is allowed to issue these policies.

The company therefore needs to have an insurer with local licences as a partner in the relevant countries. The company can then negotiate tailor-made solutions from a single source with an insurance partner in his own country who has local licences. Only a small number of industrial insurers across the world are able to meet this requirement, including HDI-Gerling.

Negative consequences for breaches

As a matter of interest, one of the intentions of prohibitions on non-admitted insurance is to provide completely transparent protection for local insurance markets and policyholders. If insurers are licensed locally, the supervisory authorities are able to ensure that the companies remain solvent, and they are further able to monitor the quality of the companies’ insurance products.

Another objective of insurance supervisory legislation in many territories is to guarantee the stream of insurance tax. If local policies are issued locally, the policyholder has to pay local taxes on this policy. The insurers pass these taxes onto the tax authorities. This means that the customer is compliant with the requirement to pay taxes.

Special requirements in relation to the levying of insurance taxes have to be observed within the European Economic Area (EEA). The free movement of services for insurers with a registered office in the EEA means that insurance cover can be provided for risks based in countries that are part of the EEA under the policy of the parent company. There are therefore no prohibitions on non-admitted insurance in these EEA countries for these insurers. The obligation to pay taxes is here based on the place in which the risk to be insured is located (not on the location of the registered office of the insurer). This is another challenge for an insurer and its customers.

The insurer has to apportion the premiums payable in an international insurance programme of a customer correctly on this basis and allocate them to the individual risks. Cooperation between insurer and customer is absolutely essential to achieve this in order to allocate premiums correctly with respect to the risk structure within the company. The insurer is also responsible for paying the taxes determined in this way within the EEA.

There are many other challenges for insurers in addition to those referred to above involved in implementation of international insurance solutions, for example sanctions, compulsory insurance policies and risk pools. A further challenge is provided by those markets in which local regulatory authorities regulate or review premium tariffs. Some countries have exceptionally tough restrictions on reinsurance and this is a major challenge for industrial insurers who set up international insurance programmes for their customers. However, a detailed analysis of all the specifics of individual territories would be beyond the scope of this article.

Borderless risks

One issue is absolutely clear from our perspective. Companies operating on the global stage need to have transnational insurance for their operational risks because these risks do not stop at national borders any more than a hurricane, a tsunami or an earthquake. At the same time, industrial insurers are confronted with huge challenges when providing insurance for these risks with international insurance solutions. The challenges can generally only be overcome by an insurer with access to a strong international network.

International insurance solutions of a globally networked industrial insurer give companies the certainty that they have clearly defined insurance coverage which is negotiated from a single source. In this way, the costs for the risk transfer and the insurance service can be controlled centrally. This also guarantees transfer of risk to co-insurers and captives involved in the international insurance programme. The parent company has a trusted contact partner through an industrial insurer with a familiar track record, while the subsidiary companies abroad are able to deal with their own local partner. This takes the best possible care of local and international supervisory and tax regulations. Another important factor is that claims settlement is carried out on the basis of uniform principles and also in accordance with the requirements of the parent company.