Why local is best–Clive Hassett, ACE

To a large degree these discussions are fuelled by the simplistic view that, provided that a particular reference source says that non-admitted insurance is allowed, there is no need for a local policy and insurance can be provided by a policy issued in the home domicile of the parent company.

If only things were that simple. The global insurance industry generates annual premiums of US$4.6tn (Swiss Re 2012), provides cover to hundreds of millions of consumers, is regulated by more regulators than there are countries in the world, and is at the same time an industry very close to the top of the list for litigation activity. Insurance, particularly when designing programmes to work across multiple countries, is a complex business.

The time to move away from such a simplistic outlook has long since passed.

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A far more considered approach is required in order to decide whether a local policy should be issued. This decision should take into account the nature and the value of the assets requiring insurance, any business activities that require evidence of insurance cover and most importantly, the desired practical and financial outcome in the event of a claim. Only when these points have been determined should attention turn to local rules and regulations-just one of which is the non-admitted position. To design a global insurance programme with its underlying local policies based solely on where non-admitted cover is allowed or not is at best imprudent and at worst, negligent.

According to Corpwatch, 51 of the world’s top 100 economies are corporations. The top 500 multinational companies account for 70% of world trade. Foreign direct investment (FDI) by multinationals is expected to top US$1.6tn in 2014, according to UNCTAD (World Investment Report 2013). For the first time ever, based on 2012 figures, the world’s developing countries absorbed more foreign direct investment (FDI) than developed economies.

It is therefore clear that the world’s major corporations will be increasingly expanding their operations in parts of the world that are inherently more risky that those where they have traditionally operated. In addition to having to face a wider and more extreme range of risks, the tools and resources available to manage and mitigate them are far less readily available than they are in the world’s developed economies.

Any FDI project by a multinational company is clearly a very significant investment. Even for an SME that’s not investing millions of dollars, such an investment is likely to be of significant strategic importance.

Such investments, be they in the primary industries, manufacturing or services sectors, will have been entered into after completing a multitude of financial, legal, regulatory and operational requirements for that particular territory. Significant funds will have been expended and employees hired, before any economic benefits begin to flow from the investment.

It is difficult to understand why insurance provisions should be considered any differently from all the other commercial contracts that have been put in place. Energies should be directed towards ensuring that the most robust possible local insurance arrangements are established to protect those assets and to assist the clients’ business activities by providing proof of local insurance cover.

The issue of cost is normally the one that comes up first. But in most cases this makes little sense given the relatively small price of a local policy compared to the value of indemnity that is being provided. Indeed in the event of a claim, any saving achieved by not issuing a local insurance policy would be many times eroded by the frictional costs associated with handling and managing claims remotely. Delays, uncertainties and coverage questions are highly likely to arise when seeking to adjust a difficult claim under a wording not developed for use in that territory.

The question of whether to issue a local policy is not primarily a question of regulation or compliance. It is a question of how a client expects a policy to operate and respond to a claim in the event of a loss in that country. Investors should make sure that their insurance arrangements are placed with a local, financially strong insurer, using local language policy documentation in a contractual framework designed to operate according to the laws of that country and allow any claim to be handled locally with reference to that policy.