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Minimizing RiskThe Role of International Insurance October 17, 2008Norfolk, VA

Marsh Inc. Marsh Inc.Matthew McDavid Bruce Cohen1051 East Cary Street, Suite 900 1255 23rd St. NW, Suite 400Richmond, VA 23219 Washington, DC 20037Office: (804)344-8975 Office: (202)263-7889Matthew.M.McDavid@marsh.com Bruce.D.Cohen@marsh.com

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Globalization of Risk & InsuranceOrientation

Causes of globalization

Insurance follows risk

Increased exposure to People, Assets, Earning, and Liabilities

Damage or injury to third parties

Consequential financial loss not arising out of damage or injury

Operations at or away from premises

Sale of products & service

Operation of motor vehicles

Pollution

LiabilityVariables: cross-border operations and sales, various legal systems, tolling operations, travel

Economic value of lost sales or production

Extra expense to relocate production to another supplier/country

Operating dependencies within the organization and externally

Continued flow of raw material to and product from key manufacturing sites

Continued use of assets

Continued operations of customers

Health and safety of employees

Earnings StreamsVariables: threats to continued operations including physical loss or damage to assets, economic, civil or political unrest, pandemics, barriers to trade, etc.

Theft or non-payment

Physical loss, damage or destruction

Contamination, rejection

Political violence, physical loss or deprivation

At an owned, leased or rented location

At a third party location (supplier, customer, while on consignment, at a dealer location, etc.)

While rented or leased

While in transit or temporary storage

AssetsVariables: fixed assets, stock, accounts receivable, cash, valuable papers, media, intellectual property

Sickness, injury or death

Detention for ransom or political reasons

Loss of a key employee

At work or going to/from

While traveling to/from or working outside their home country

PeopleVariables: who is hired, nationality, where hired, where working or traveling, personal security, conflicting legal jurisdictions in case of injury/death, importance to the business

INSURABLE RISKEXPOSUREFOCUS

Damage or injury to third parties

Consequential financial loss not arising out of damage or injury

Operations at or away from premises

Sale of products & service

Operation of motor vehicles

Pollution

LiabilityVariables: cross-border operations and sales, various legal systems, tolling operations, travel

Economic value of lost sales or production

Extra expense to relocate production to another supplier/country

Operating dependencies within the organization and externally

Continued flow of raw material to and product from key manufacturing sites

Continued use of assets

Continued operations of customers

Health and safety of employees

Earnings StreamsVariables: threats to continued operations including physical loss or damage to assets, economic, civil or political unrest, pandemics, barriers to trade, etc.

Theft or non-payment

Physical loss, damage or destruction

Contamination, rejection

Political violence, physical loss or deprivation

At an owned, leased or rented location

At a third party location (supplier, customer, while on consignment, at a dealer location, etc.)

While rented or leased

While in transit or temporary storage

AssetsVariables: fixed assets, stock, accounts receivable, cash, valuable papers, media, intellectual property

Sickness, injury or death

Detention for ransom or political reasons

Loss of a key employee

At work or going to/from

While traveling to/from or working outside their home country

PeopleVariables: who is hired, nationality, where hired, where working or traveling, personal security, conflicting legal jurisdictions in case of injury/death, importance to the business

INSURABLE RISKEXPOSUREFOCUS

Global risks are more far reaching and less predictable

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Subsidiary

A World of Risk

Risk are geographically diverse and intrinsic to certain regions

Market Conditions

IRB Privatization

Avian Flu

Currency Devaluation

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Insurance Issues for MultinationalsEurope: Environmental Liability

The EU Environmental Liability Directive took effect April 30, 2007 – Each country responding differently– Requirements apply across all member countries

Adds to the former third-party liability that companies had for bodily injury and property damage

Only government authorities are entitled to claim for remediation or indemnification

Does not require any financial security or oblige insurance purchase– This will be looked at again in the near future

A few local and global markets exist for third and first party coverage for the new conditions, but this will usually be under an environmental program, not a general liability program

Risk Evaluation“Global Check Up”

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Global Check Up Risk Evaluation & Audit Goals

A systematic and comprehensive process to assist in the evaluation and treatment of global insurance and risk management programs

The goals of an audit should include:– Enhancing the quality of information needed for management

decision making on global insurance programs– Reducing a firm’s total cost of risk globally– Increasing a company’s confidence in its global insurance portfolio– Limiting a firm’s foreign exposure– Optimizing and sustaining a regulatory compliance processes– Reducing potential regulatory compliance costs

Increased confidence when risks are identified, measured, monitored, and managed

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Global Check Up Risk Evaluation & Audit Process

An audit process involves:– Analyzing compliance with local laws and customs– Reviewing exposures, risk quality, and loss experience by country– Identifying gaps in coverage or duplication– Eliminating redundant insurance purchases– Assessing financial security of all insurers in each country– Documenting all insurance policies in a central database– Identifying opportunities for centralized purchasing of insurance

and related services, including risk control– Highlighting broad socioeconomic and political threat issues– Reviewing processes, procedures, and communications protocols

for global risk management– Providing alternative program designs based on a review/analysis

outcome

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Global Check UpAlternative Program Structures

Options Process Pros & Cons

Non-Admitted

A B C D E

Fragmented with a DIC

A B C D EDIC

Controlled MasterProgram (“CMP”)

A B C D EDIC

Customized CMP

A B C D EDIC

Fragmented

A B C D E

• Each operating unit buys insurance according to its own perceived needs.

• Compliance with insurance regulations is decentralized.

• Policy summaries are provided to whoever wants or needs to know.

• As above.• Coverage is standardized, eliminating possible

coverage gaps within and between individual policy territories.

• DIC premiums may be allocated internally.

• Insurance is negotiated and placed with an insurer using its international network to issue policies in each country as needed.

• Compliance with insurance regulations is centralized.

• Premiums are paid centrally or locally.

• As above.• Local policies may be broadened to meet

unique, local requirements for coverage or limits.

• Centrally-managed funding programs can be structured to bridge differences in risk retention or coverage.

• Best suited for a company with a hands-off, decentralized management style.

• The most expensive approach (“sum-of-its-parts”), with little quality control.

• Oriented to the interests and buying style of the individual operating or business unit.

• As above.• Adds some measure of uniformity, along with

incremental cost.• DIC provides “non-admitted” coverage, raising

possible legal and tax issues.

• The most cost-effective approach overall.• May be vulnerable to attack at a local level.• Requires buy-in at all levels and equitable

distribution of costs.• Some coverage is “non-admitted” or exposure

must be self-insured.

• As above.• Allows customization to the needs of operating

units.• Can create potential cash flow and non-

concurrency risk for a client’s captive.

• All insurance is arranged centrally at the corporate level.

• No underlying policies are issued; cover is “non-admitted” OUS

• Premiums may be allocated internally.

• Lowest direct cost.• Not compliant in most jurisdictions. • Raises potentially severe tax issues• No sharing of costs with partners.

CostCoverage

Max

Min

Aligning Product with Coverage & Cost

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Global Check UpEvaluation of Risk Financing Options

Insurer

CaptiveRetention

Retention

InsurerInsurer

Insurer

CorporateDeductible

• Competitive market, especially OUS

• Best suited for low risk or compulsory lines

• Guaranteed cost• Loss sensitive options

available for casualty

• Could be lowest cost of risk transfer

• Greater autonomy in handling claims

• Requires acceptance by the foreign affiliates and stakeholders

• Can be combined with other options

• Not possible for compulsory lines

• Can minimize IPT• Premiums allocated

generally exclude funding for expected losses

• Claims absorbed corporately or allocated back internally

• Could be coupled with a captive indemnity policy

• Could be used to allocate non-program premiums (Excess Casualty, D&O, etc.)

• Common structure for clients with captives

• Premiums include funding for expected losses, using projections from the insurer or an actuary (or both)

• Can include aggregate loss protection

• Versatile, applying to a broad spectrum of property and casualty lines

Captive ReinsuranceLocal Retention Matching DeductibleInsured Program

Captive

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Global Check UpPotential Outcomes

A clearer picture of the global risks a company faces

Assist in market entry analysis

A look at the various options for managing them– Program structures and risk financing methods

Action plan to bring it all together

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Globalization of Risk & InsuranceConclusion

Evaluating international risks helps ensure structural integrity of risk and insurance programs

Better protect a company’s People, Assets, Earnings, and Liabilities

New generation of risks in regulatory compliance

Sound technical risk management, market knowledge and planning will help find the upside in international risks

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