The ins and outs of insuring multinationals
In Canadian business, there’s almost no Canadian-only business. We’re a small nation, and exporting, opening up a branch office for sales or services, sending teams abroad or partnering with an overseas manufacturer are common strategies for companies seeking a stable and healthy bottom line.
Canadian companies export more than $500 billion worth of goods a year and invest nearly $90 billion in businesses overseas. But with money and people moving around the globe comes risk.
That’s why insurers like AIG Canada say writing policies around the world for Canadian companies is currently one of its biggest growth areas. “Nobody wants to be in a situation where they’re not compliant,” says Catherine van den Berg, assistant vice-president and global casualty manager at AIG Canada.
The trouble is, compliance looks quite different in various corners of the world. Emerging nations in South America are regularly adding new business regulations that target multinationals, taxes in Africa are through the roof, and regulations in the EU have long been complex. “Every country has a nuance. It’s all about understanding the country you’re doing business in,” says Grant Williamson, strategic new business development leader for Eastern Canada at Jardine Lloyd Thompson Canada.
For brokers, offering meaningful protection for a multinational Canadian company requires strong contacts, research, time and care. “You need an understanding and framework to map the tax and legal requirements against the client’s exposure,” says Leszek Bialy, vice-president, head of customer, distribution and market development, and head of alternative risk transfer, for Zurich Canada. “If you have focus and experience doing this, it’s not difficult.”
Along with setting up complex policies, brokers may need to educate clients—particularly start-ups and those just starting worldwide forays—about their multiple risks far from home. “Lots of the reasons for insurance come in hindsight,” says van den Berg. But when firms do business around the globe, things can and will happen.
Types of risk
Decades ago, companies doing work overseas easily understood the need for property and marine insurance: if a ship sunk, they’d get some of their investment back. In today’s global economy, with all its local, national and international regulations and tax structures, insurance across borders is anything but straightforward.
On the property side, companies need to protect assets such as offices, factories and inventory. But some regions, like Japan, have specific risks for incidents such as floods, tsunamis, earthquakes and fire. Certain regions have insurance pools for known local risks—such as the Pacific Catastrophe Risk Insurance scheme—which companies want to know how to tap into those.
Meanwhile, environmental insurance has become increasingly key in foreign jurisdictions where pollution, use of asbestos, the growth of mould and other risks can disrupt a business.
Then there are the geopolitical threats in unstable regions. Civil unrest, political violence, terrorist acts and vandalism can interrupt business, put employees’ lives at risk and destroy property. Bialy points to Libya where, since 2011, civil unrest and changes in government have meant ongoing instability and challenges for anyone working on the ground there. “Clients need to deal with someone from an insurance standpoint who is aware of those issues,” he says. Finding the right insurance package to cover such eventualities comes with its own debates.
Meanwhile, E&O coverage is becoming more and more necessary in foreign markets where “we’re seeing an increase in litigiousness,” van den Berg says. Both developed and developing nations have more rules about how businesses should operate, and many run complex tax structures. Airtight coverage is important, especially if there’s any legal risk.
Human resources coverage is another major concern— not only for the business and its reputation, but also for local rules on matters like workers’ compensation, which tend to be rigid and require total compliance.
Canadian companies working abroad must have some kind of workers’ compensation in foreign countries where they work. Usually, local rules on this are inflexible. “A regulation is a regulation,” Williamson says. “Even if you have two employees, you can be in breach.” The issue of reputation comes into play here, too: no Canadian company wants to be seen as exploiting local workers.
Going the simple route
In the past, companies just covered their overseas operations with an overarching at-home policy and called it a day. But running insurance strictly out of Canada means companies have a so-called nonadmitted policy in the overseas nation where they’re doing business.
“A Canadian company with some global sales and one individual who travels around the globe and no local entities outside of Canada—it may be less aware [of its insurance risk] and have less need,” Bialy says.
If a company has truly limited exposure overseas, its Canadian insurance may be enough. Countries such as India and the U.K. allow non-admitted policies, so one policy from home might be fine—provided it takes into account all the local laws and regulations. For instance, India has a cash-before-cover law: you’re simply not covered until the policy is paid for, sometimes in full.
But many countries will levy penalties on those companies running non-admitted policies. Sure, an operation’s paperwork might go unnoticed for years, but if there’s a claim, local authorities will often come knocking.
“Countries are really starting to clamp down,” Williamson says. The financial authorities in emerging nations such as Argentina and Brazil, for instance, will periodically audit multinationals, and fine those that don’t comply. “The manner in which they’re trying to increase revenue is to be more stringent and look at overseas companies,” he says.
Van den Berg says another trend is working against the non-admitted policy: local authorities really want to know the companies doing work on their soil. Depending on the country, “if a government is going to allow you to do business in their jurisdiction, there is an increasing interest to understand that Canadian company’s operations.”
Another serious glitch with non-admitted policies is getting claims payouts over borders. “Getting the money in is hard,” says Williamson. There can be a holdup or extra costs, or the arrival of money can trigger penalties.
And lacking admitted policies can jeopardize business transactions with partners within the foreign country. Stakeholders may require proof of insurance to broker a deal. In the case of a dispute, lack of the right kind of insurance can leave you liable or nullify a contract. “You want contracts to be airtight,” Williamson says.
This long list of disadvantages has made covering foreign businesses solely from home less common for Canadian companies—particularly mid-size ventures and those doing more work overseas than just having the occasional salesperson on the ground. “A lot of companies are moving to being compliant in the country they do business in,” Williamson says. “There’s definitely been a shift.”
That could mean setting up an array of local policies in the countries where a company works. But most multinational insurers offer something more sophisticated: a controlled master program and numerous locally admitted policies. The master program takes care of any Difference in Conditions and Difference in Limits (DIC/ DIL) not covered in local policies. Set up properly, this package dovetails together and leaves a company with seamless and often quite consistent coverage in every nation it does business.
Those local admitted policies can be tailored to be complaint with local laws and regulations, as well as offer extra coverage for risks—be they environmental, financial or political—unique to that corner of the world.
Some policies might actually be set up locally as a fronting policy. The local representative holds paperwork on the insurance to satisfy local rules, but the real coverage comes from Canada. When there’s a claim, the money flows through the local representative for the payout. “That’s the way it’s often done, but clients might only know the bigger picture,” Williamson says.
Brokers working on a controlled master program and local policies will find themselves dealing with a doubling of stakeholders, van den Berg notes. Instead of just the broker, client and insurer, now you have the local broker, the overseas subsidiary of the company and the local insurance carrier.
The international insurers offering this kind of product offer a pivotal service: they often run a team that keeps tabs on the evolving rules and regulations in hundreds of countries, and can put these policies into place with surprising efficiency.
These policies require a review before renewal each year. Emerging markets often have new rules that impact insurance. Expect taxes to go up, rules to become stricter and companies to do more to stay within the law.
The best ally in setting up—or renewing—a solid multinational policy is time. Piles of government-required paperwork takes time to fill out and approve, so the longer the team has to research the local economy and connect with local representatives, the better.
Clients also need extra time to make decisions: not just about compliance, but on the usual issues, such as dealing with low-risk situations and deductions, and the amount of coverage. “Execution takes time,” says van den Berg, so budget at least 30 days to write a policy.
For brokers new to the international insurance market, creating these complex packages can be daunting, but it’s the way business is going. International insurers offer support, including education, for those new to this work.
“We’re looking at a more global economy,” Bialy says. Companies may balk early on at the costs and paperwork, but, longer term, there’s value. “Insurance provides a financial and social benefit,” he says. “If we’re able to focus on the risk, our customers can actually focus on what they do well: innovate and compete.”
Copyright © 2016 Transcontinental Media G.P. This article first appeared in the August 2016 edition of Canadian Insurance Top Broker magazine