Global Programs: Keeping Insurance Relevant
This article first appeared in the Captive Review’s Global Programs supplement.
Ryan Gustafson and Stephen Morton consider the role of global programs in the context of a changing world.
What are some of the concerns your multinational clients are raising with you about the risks they face globally?
Stephen Morton: One common theme, whenever you speak to a client or to a broker, is how can we be more relevant and ‘how can insurance become more relevant?’, because the nature of balance sheets is changing. Cyber also comes up whenever we speak about global programs. It is by nature a multinational risk and one where there are multiple solutions in the market, but it's not a mature product, and that's one of the areas where we are seeing very significant growth.
Right now, and over the last couple of years, especially in Europe and the UK, there has been a lot of talk about Brexit and how do we ensure insurance programs are 'Brexit proof'. AIG’s approach to Brexit has been, 'let's hope for the best but prepare for the worst'. So the solution we've set up is one that would get us through a no-deal scenario. We have the ability of covering UK risks and EU risks in two completely separate ways to ensure complete compliance for our clients going forward.
And then lastly BEPS, BEAT, the EU's proposed digital services tax, new tariffs and the death of the Trans-Pacific Partnership are all developments that have happened over the past 12 months and that signify that trade is being done differently now. All these issues are challenging companies in the way they trade and comply with local regulations.
What are some of the advantages of having a global program in the current environment?
Ryan Gustafson: The advantages of global programs continue to be the same and they are mostly around the level of control in terms of coverage and being sure that, as a risk manager, you know the level of coverage and the level of exposure you have around the world. It's about having that knowledge, that consistency and that certainty of cover.
And then there is also the financial piece - it could be more economical to have a global program. It is also fair to say that you are a more strategic client to your insurer and broker if you have a global program, as opposed to having multiple different policies with multiple carriers.
"AIG’s approach to Brexit has been, 'let's hope for the best but prepare for the worst." -Stephen Morton
How can captives complement an organisation's insurance program?
Stephen Morton: Certainly in a world where more and more assets are intangible and where the balance sheets of a lot of the very large corporations are made up of intangible assets, there is a role for captives to play in terms of being an incubator for some of these newer risks. When compared with commercial insurers and reinsurers, captives can potentially absorb risks for which there may not yet be an appetite in the wider insurance market, for instance fines and penalties or social media risks.
Why is it important to have a strong local network?
Ryan Gustafson: We are increasingly seeing how new legislation is being enacted in very short time frames, such as the tax reform in the U.S., which brought the BEAT tax with it. Having that knowledge on the ground, so that you can anticipate and optimise your programs, is very important. In fact, nothing replaces eyes and ears on the ground. The importance of local interpretation of regulation cannot be understated.
The other piece around this is having the right structure. And that means not just people on the ground but also the right level of monitoring, so you can make that information available to everyone.
If a country is changing the exportability of reinsurance for instance, say they are increasing the level of reinsurance you can take out of the country, it is important to communicate that to your clients so they are aware of the opportunities. And you need to give them enough time lead time so that you can actually do things differently and optimise your programs, because things do change very rapidly.
How can a local presence help overcome certain challenges?
Stephen Morton: There is a huge amount of opportunity in Africa, the Middle East and Asia right now, such as with the Belt & Road Initiative and some of these giant infrastructure contracts taking place. And if you go into some of the markets where businesses are looking to expand, quite often the local insurance markets are not very developed at all. At times we have to work with the regulator to really understand the requirements they want to put in place and what the possible implications are for the client.
Challenges can also arise with the trending increases in required retention rates, particularly in emerging markets, which can be left overexposed to and overburdened by potential large losses that can fully erode the local market capacity. Our multinational clients have risks that are substantial and they require an appropriate limit of liability so part of our role is navigating those challenges and communicating with regulators, and in some cases, advocating in those environments on behalf of our clients.
It is best to avoid a situation where the client has a significant claim and then at the same time has to deal with potential reputational damage, possible non-compliance and even fines if they are found to be in misalignment with local requirements. A multinational company could be inadvertently exposing its directors and officers to liability, which can get pretty complex and high profile (internally and externally) very quickly.
Having local policies in place is so fundamental. Nothing truly replaces a local policy. It means we can step in and articulate the situation and provide guidance on local best practices and regulatory requirements. We can engage with regulators where necessary and ensure compliance while proactively handling any claim situations that have arisen.
"We are increasingly seeing how new legislation is being enacted in very short time frames, such as the tax reform in the U.S., which brought the BEAT tax with it." -Ryan Gustafson
What is the role of technology when it comes to servicing and extracting value from global programs?
Ryan Gustafson: Technology is one of the reasons why globalisation continues, although at a slightly slower pace, and why the world continues to get smaller. We are well past the point where we can execute global programs without also investing in market-leading technology, both from a policy issuance perspective, a general compliance standpoint and also from a claims perspective.
The numbers are overwhelming. At AIG, we administer thousands of multinational programs and issue tens of thousands of local policies each year, all around the world. So you need to have the right level of technology sitting behind this. You can't just do it on the basis of email exchanges. We've developed systems that help us deliver optimum program management, and that enable clients to monitor their programs’ real-time performance in different geographies.
Any carriers that don’t have a technology platform sitting behind their multinational programs will be limited going forward. And that's one of the reasons why there are relatively few players who can truly handle very large and/or complex programs. It requires building the architecture of the program, then managing the program in terms of policy issuance and premium payments etc, and lastly, handling and tracking claims electronically.
Technology is hugely important in terms of adding greater transparency and control, and the insights that can be extracted from the claims data. You can get better information from the losses, which you leverage into being more strategic and then feed all of that back into the first part of the cycle -the architecture of your program. So it's also about managing in a far more proactive way, using technology as an enabler.