Navigating An Uncertain World
This article first appeared in the Captive Review’s Global Programs supplement.
Nuno Antunes, Head of Multinational – UK, considers how those operating global insurance programs can function throughout uncertain times
From the U.S.-China trade tensions to Brexit and the United States–Mexico–Canada Agreement (USMCA), multinational organisations are operating in a dynamic and increasingly fragmented global trade landscape. From the perspective of multinationals and captive owners, global insurance programs must keep up with changes that occur - however rapid - providing consistency and certainty of cover.
The rules-based order that underpins global trade is at a major inflection point. The World Trade Organisation (WTO) expects trade volume growth to fall to 2.6% in 2019, down from 3% in 2018. Trade conflicts, increased economic and political uncertainty, a rise in protectionism and an altogether more complex, interconnected world are presenting new challenges for multinational organisations and their insurance carriers.
"Trade cannot play its full role in driving growth when we see such high levels of uncertainty," said WTO Director-General Roberto Azevêdo in April 2019. "It is increasingly urgent that we resolve tensions and focus on charting a positive path forward for global trade which responds to the real challenges in today's economy – such as the technological revolution and the imperative of creating jobs and boosting development."
Faced with such challenges, AIG launched its Global Trade Series earlier this year, which brought together policymakers, business leaders and global trade experts on three continents to examine critical trade issues through a regional lens. At events hosted by AIG and its partners in Washington DC, Rotterdam and Shanghai, the need for WTO reform and the likely impact of new technology and digitisation on trade patterns were among the themes discussed.
Issues shaping the future of global trade and the challenges for businesses operating within that environment were also considered, such as the growing volatility of the macro geopolitical landscape. This included political pressure and the volatile trade relationship between the U.S. and China, concerns about an undefined trade policy between the UK and EU post Brexit, geopolitical conflicts, financial market turmoil and rapid technology advancements.
Speaking in Shanghai in June, Jon Gregory, head of kidnap & ransom at AIG, addressed the potential people-related threats for multinationals posed by activities and construction as part of the ambitious Belt & Road Initiative. Meanwhile, at the Port of Rotterdam event in May, Kristof de Bremme, global head of marine, and Marilyn Blattner-Hoyle, global head of trade finance at AIG spoke about how technology and digitisation was introducing new efficiencies to trade in their respective insurance markets. Insights and intelligence were shared widely with policymakers, partners and multinational clients.
"Trade cannot play its full role in driving growth when we see such high levels of uncertainty" -Roberto Azevêdo, WTO Director-General
Implications for multinationals
It is clear that a more complex and interconnected global risk landscape is presenting businesses with new and emerging exposures. As companies move into developing markets, due to shifts in outsourcing or to participate in infrastructure development (including territories where projects are planned or underway as part of China's Belt & Road Initiative), there are inevitably both new and growing risks to understand and mitigate.
For example, environmental risks remain a key concern for multinationals operating in many regions. Extreme weather was the greatest risk of concern highlighted in this year's WEF Global Risks Report 2019, after the worst year on record in terms of natural disasters. The economic cost of natural disasters in 2018 reached $225 billion, according to Aon Benfield, of which $90 billion was covered by insurance.
From earthquakes in Indonesia, flooding in Japan, India and Nigeria, to major windstorms in the US and Asia - including Hurricane Michael and Typhoon Jebi, and volcanic eruptions in Hawaii and Guatemala, there was considerable economic damage. Meanwhile, wildfires in Greece and California have raised questions about the increasing influence of anthropogenic climate change on extreme weather and related perils.
Alongside this, the increasingly intangible nature of commercial risks has driven the need for new products such as cyber insurance. As a peril, cyber has no respect for international borders, as major ransomware attacks, such as WannaCry and NotPetya, have demonstrated. Although the cyber insurance market is still maturing, there is a concerted move towards ensuring cover is affirmative within traditional policies alongside a growing demand for multinational cyber insurance.
From a legal and regulatory perspective, some of the more recent changes within the trade environment have occurred quickly and without much warning. In the last 12 months there have been:
- Changes in compulsory retention rates and market exhaustion rules, where local markets must be exhausted before foreign markets can be approached (for example South Korea, Iraq, India and Malaysia)
- Movements in insurance taxes and financial transaction taxes
- Minimum insurance rate changes (Uganda and Egypt)
- Cyber related legislation, e.g., GDPR, California Consumer Privacy Act, New York Department of Financial Services cybersecurity regulation, etc.
- Ever-increasing know your customer (KYC) and anti-money laundering (AML) requirements (Mexico, Qatar and Tunisia)
- New insurance and reinsurance laws that restrict the placement of risks in a different jurisdiction
Protectionism is evident in some of these new developments. With effect from August 2018, for instance, an exporter of coal and crude palm oil and importer of rice must purchase cargo insurance from the domestic Indonesian insurance market, regardless of the terms of sale. Without holding a certificate of insurance issued by an Indonesian insurance company, exporters will not be able to gain the necessary permit from the authorities and, as a consequence, the vessel will not be allowed to sail.
Insurance is also impacted by non-insurance specific developments. For instance, a very recent high-profile judgement in the UK has allowed action against a UK parent for losses arising in Zambia, where they have a subsidiary. This is a clear sign that holding corporations can face direct liability for foreign claimants in English courts, which goes against current assumptions of location of risk.
The introduction of the new U.S. base erosion and anti-abuse tax (BEAT) was progressed and signed into law within an extremely short timeframe. Part of the recent tax reform in the U.S., the BEAT tax, along with base erosion and profit shifting (BEPS) project developed by the intergovernmental Organisation for Economic Co-operation and Development (OECD), indicates that related party transactions are coming under focus more widely with implications for multinationals and their captives. Work has been carried out, both on the client side - through the Federation of European Risk Management Associations (FERMA) for instance - or within insurance industry working groups. FERMA has called for the OECD to produce final guidance that is "clear and robust enough to provide multinationals with some legal certainty in terms of their captives".
Finally, the EU’s new tax transparency initiative DAC 6 will introduce mandatory reporting of ‘reportable cross border arrangements’. It remains to be seen how insurance and reinsurance structures (including captive arrangements) might be affected by this new piece of legislation.
The need for consistency and certainty
Despite the many geopolitical challenges facing global trade, globalisation is continuing as organisations look to expand across geographies in their search for growth and cost efficiencies, albeit at a more subdued rate. There has been a 70% increase in the number of multinational companies since 20111, and the number of multinational programs from AIG produced out of China rose by 30% in 2018, followed by growth of 11% in Brazil and 8% in India.
The pace of change and intensifying nature of global risks has elevated the role of insurance and risk management. Set against the current global landscape, the value of a truly global risk partner is undeniable. Multinational companies are increasingly seeing the need for international program cover that can address a growing number and magnitude of risks. As global trade embraces a more protectionist regime it will invariably have an increased impact with respect to compliance as companies seek to avoid fines and reputational consequences of falling foul of regulatory requirements.
It is important for insurers and brokers to have an extensive and well-connected global network, as well as access to intelligence and knowledge tools, both internally and externally through partnerships with think tanks and consultants. A local presence is increasingly vital in order to settle claims quickly and effectively.
"As global trade embraces a more protectionist regime it will invariably have an increased impact with respect to compliance..."
As part of the tripartite insurer-broker-insured relationship, it is critically important to know whether policies from locally-licensed carriers are required in such territories and understand which tax rules prevail. In some circumstances, global programs can be tailored so that the 'master' policy drops down to complement locally admitted insurance policies in countries where local placements are required.
Beyond the obvious benefits of price optimisation and balance sheet protection, multinational insurance programs can help organisations respond proactively as the trade environment becomes more uncertain. Carriers and brokers can optimise the architecture of the program when there are changes in trade and legislation, ensuring there are no gaps in cover and that individual policies will respond as expected when a loss occurs.
1 AIG estimates