Time for action on global programmes

As regulators ratchet up their efforts to enforce compliance, and turn their attention to insurance buyers, risk managers must redouble their efforts to comply and a market solution must be found. The issue, noted John Hurrell, chief executive of Airmic, in his opening address, is the one subject that has stayed on the list of problems that keep its members awake at night for as far back as he can remember. Many other subjects appear on the ‘Airmic insomnia list’ for two or three years and then disappear as answers are found, but this is not the case with global compliance, he stressed. “It seems to be an intractable problem and one that the industry needs to address.” Airmic’s annual survey reveals that there are three critical issues that insurance buyers and risk managers need their global programmes to satisfy. The programme needs to be compliant with all local laws, regulations and fiscal requirements. The policy must pay claims in the required country, in the required currency without fiscal sanctions or penalties and changes in local requirements must be automatically addressed.hideThis is not too much to ask, suggested Mr Hurrell. “But despite all of the investment which goes into global compliance, we seem to be no nearer a solution than we were when we first looked at this some years ago. “The reality is that brokers and insurers have invested heavily in their own compliance requirements but not necessarily in the compliance requirements of their clients,” he said. As concerns over compliance and tax in relation to global insurance programmes grows, risk managers now prioritise compliance alongside breadth of coverage and cost. Ensuring that these three circles come together as closely as possible is a balancing act, said Praveen Sharma, head of the regulatory and tax practice at Marsh. “And we are not going to get a perfect nirvana guys,” he told attendees. “Perfect nirvana would be all of these [circles] overlapping each other 100% and that is not going to happen in my seven incar-nations under Hindu religion that is for sure.” The issue of compliance is a hot topic amongst regulators, who are increasingly focusing their attention on buyers of insurance. Historically non-compliance has been seen as a problem for insurance companies, said Peter Hodgins, a partner in Clyde & Co’s Middle East Financial Services Group. “What we are finding is regulation in various parts of the world that say yes it is a problem for the insurance company, but that it is also a problem for the broker and now for the insured as well. And they are starting to impose penalties on the insured as well as everybody else involved in the chain,” he explained. The experts gave three examples of new-found aggression from regulators. In Switzerland a broker bought non-admitted professional indemnity coverage and its operations in the country were shut down. This ‘armageddon scenario’ is the biggest risk that companies face, said Mr Hodgins. The Mexican regulator announced at a press briefing two years ago that if its insurance regulations are breached buyers will not only be fined, but possibly go to jail. “That is a very profound statement to be making at a press briefing about these kinds of issues,” noted Mr Sharma. And, in Argentina a recent life insurance case has seen the regulators impose a fine of eight times the value of the premium policy on an insured and 15 times the premium on a broker for the placement of non-admitted insurance. This was a life policy and the amounts not that high but the regulator was ‘setting a marker down’, warned Mr Sharma. “These are just some examples, they are not gospel, but they show that regulators are looking at these issues,” he added. The Global Programmes seminar culminated in an agreement between the insurers, brokers and risk management association leaders present to sit down and begin discussions to help solve some of the problems. (see related story on page 1). Solutions include a shared database, a depository web site that could contain all regulatory data and updates and, in the longer term, action from regulators to help address some of the major issues. Airmic will also publish a guide containing about 80 different questions, which are intended to provide a framework to assist its members when structuring a global programme. There are also current solutions in the market to the problem and practical steps that insurance buyers can take to improve their chances of compliance, the experts said. Financial interest cover is one such solution. “It is one of the hottest topics currently and questions arise as to whether it could represent the panacea and solution that you (buyers) will be looking for,” said Andy Tromans, a partner in Clyde & Co’s corporate insurance group. Financial interest cover is a different approach to the traditional DIC/DIL structure of a global programme, whereby the value of a particular loss of an asset on the balance sheet is covered. The calculation of loss under financial interest cover will therefore be different, said Mr Tromans. “Rather than saying we have a factory worth $70m that is a total loss and you make a claim for that, the loss is calculated by the loss of the balance sheet value of the subsidiary, which may actually be a higher or lower amount,” he explained. The advantage of this kind of structure is that it should enable insureds to obtain local compliance. This is because local issues are taken out of the equation as coverage is bought centrally on an international basis. In terms of simple advice, Mr Sharma urged buyers to challenge insurers on the topic of tax and compliance on multinational programmes. He warned that there are currently ‘real inconsistencies’ amongst underwriters on this issue. “You must challenge insurers about their attitude to compliance. Will they pay the claim in the country in which the loss occurs? Ask: ‘Can you make it clear please, transparent and upfront, right now, before I sign on the dotted line?’” he said. Risk managers must also work on their premium allocation methodology and ensure that it is ‘just and reasonable’. And, most importantly of all, he called on buyers to fully document the methodology. This is because regulators will, at the very least, want to see that a logical effort was made to comply with the rules. And, beyond these practical steps, risk managers all over Europe must back their national associations such as Airmic and Ferma in this latest effort to seek some kind of industry solution that will be of benefit to all insurance buyers.

Time for action on global programmes

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