Foresight may provide the best risk insight in a multinational programme
In the competitive multinational insurance environment, insurers must increasingly convert risk insight and trends to actionable intelligence. Risk insight unquestionably improves customer relationships and sharpens underwriting results.
In the competitive multinational insurance environment, insurers must increasingly convert risk insight and trends to actionable intelligence. Risk insight unquestionably improves customer relationships and sharpens underwriting results. The sizeable investments made to attract and service each multinational insurance programme require proactive strategies to consistently strengthen those relationships and favourably drive the retention of these highly valued customers.
The time to “earn the business” with insightful discussion is well before the multinational insurer and insured have experienced a major loss in a faraway place. Pre-loss stress testing a multinational programme offers the insurer and insured confidence that their programme will operate as intended.
Yet, it is quite common for multinational insurance programmes to achieve clarity and crystalise contract certainty only through hindsight. A significant loss far from the insured’s corporate headquarters and the lead underwriter’s desk quickly bring the cross-border realities of such a programme into focus. Unquestionably, the risk manager and the programme’s broker are expecting immediate reassurance that their programme has been well attended. This expectation only amplifies if the loss has attracted the interest of one or more local regulators, governmental authorities, or the multinational’s senior management. Insureds, and insurers, understandably expect their programme will function as well outside their primary markets as it does within. Programme clarity, confidence, and credibility are paramount.
As anyone who serves the multinational insurance market knows - the sheer volume of verbal and written communication across multiple languages, variances in insurance customs and practices, and ever changing regulatory environments provide ample opportunity for miscommunication or misunderstanding to occur. These complex insurance programmes deserve a quality assurance review.
Pre-loss stress testing provides these programmes with that quality assurance opportunity. By testing their programme, the insurer and insured not only have the opportunity to spot inadvertent programme challenges but perhaps more importantly, pre-loss testing provides them with an opportunity to strengthen the relationship, preparedness, and collaboration needed when a loss abroad does occur.
The headlines as well as the parties’ respective loss portfolios provide ample scenarios to measure the regulatory, legal, and adjustment environments their programmes will globally encounter. Testing scenarios should be tailored to the unique risks, territories, and products most notable in the programme, such as: hurricanes, earthquakes, floods, fires, environmental damage, explosions in industrial or business centers, political unrest, corporate investigations, claims against executives, and cyber risks.
At minimum stress testing illuminates routine insurance issues under foreign law, such as principles of insurable interest, construction/interpretation, and language translation risk. More significantly, such testing illuminates compliance with anti-money laundering laws, the practical implications of extra-territorial master policies, prohibitions against post-loss policy amendment, tax implications associated with loss, exchange rate impacts of indemnification through DIC/DIL provisions, and effects on repatriation of defense or settlement funds to the loss country. The issues will vary with the products and territories implicated. Selective and periodic pre-loss stress testing will not eliminate all risks inherent in a multinational programme but over time improvements in clarity and confidence will enhance the programme, as well as the parties’ relationship. These insights will steadily influence the underwriting of the insurer’s multinational portfolio, undoubtedly sharpening their results.
A straightforward testing example would be to consider a significant weather event - a hurricane - severely damaging several properties in a country where the loss experience has been limited under the programme. To be meaningful, the test should apply the full measure of actual policy terms, regulation, and unfamiliar territorial practices, as if the loss happened immediately after policy inception.
For illustration, consider a programme insuring a multinational real estate investment company domiciled in Australia, with luxury resort properties located along several beautiful coastlines. The insured and insurer would select one or more locations where the insured holds property to examine - the Caribbean, the Mediterranean, or South America. Fundamental loss facts would need to be agreed, e.g. two separate properties suffer a covered total loss of buildings and personal property, each valued as significant eight figure losses.
Through testing, insurers would confront whether the policy completely and accurately designates all the entities with an insurable interest in the property, and whether the valuations are accurate. As insurers and insureds identify and correct any errant policy provisions they may expose, they will have avoided problems otherwise potentially experienced by strict laws prohibiting post-loss policy amendment at the time of an actual loss. Such a review also allows confirmation of compliance with all anti-money laundering requirements, clearing the path to timely advance payment and expediting the insured’s recovery.
Pre-loss testing enables identification of potential “differences in conditions” between the programme’s local and master policies and reconciliation of any inconsistencies that may impact the flow of proceeds under either policy. Examining scenarios before an actual loss allows the insured and insurer to spot and remedy unintended costs relating to currency exchange or repatriation of funds paid abroad. Further, substantial losses suffered by a foreign domiciled insured may well attract the attention of various governmental or taxing authorities, and insurance regulators. Programme stress testing provides an opportunity to consider those anticipated inquiries and ensure that local law and regulation are confidently addressed on behalf of both the insured and insurer.
In the ever changing global landscape, a loss arising under the intersecting complexities of a multinational insurance programme will always be a source of valuable insight. To the extent acquiring this insight precedes a significant loss, it will be most meaningful to the programme and insurance relationship. Pre-loss amendment or better programme design based on such insight allows the insurer to “earn the business” well before a faraway, disruptive loss experience may ultimately shape the relationship. “Of all the forms of wisdom, hindsight is by general consent the least merciful, the most unforgiving.” A strategy to take careful foresight of the multinational insurance programme would yield a significant return on the insurer’s investment and may well provide the competitively actionable intelligence needed to serve its relationship with a most valued customer.
This article was first published by Insurance Day on 26 April 2017.