The global insurance compliance headache for large corporates operating in multiple jurisdictions is only intensifying. Veronica Cowan explores if and how a central rules database could help.
Knowledge is power, but interpretation is the key to using it, and risk managers of multi-national companies need both to satisfy their boards that risks are being managed in a way that protects the company and its reputation.
Nevertheless, the Federation of European Risk Management Associations' 2010 benchmarking survey revealed that, while 83% of respondents were quite confident of their insurer's ability to follow them geographically, 31% wanted them to exercise better control over local insurance partners. Only 44% rated insurers' capacity to have local policies issued in compliance with local regulations as excellent or good, while speed of issuance of policy documents and contract certainty remains a real problem.
Simultaneously, enforcement is being stepped up, and Ferma members are looking to their insurers and brokers to piece together the jigsaw of laws, rules, regulations and taxes in the countries in which their companies operate. Without this essential knowledge they will struggle to deal with issues such as compulsory insurance, insurance premium tax, diverse legal systems and reinsurance restrictions in their many and varied jurisdictions.
Major brokers and global insurers have invested to capture and track regulations, believing it gives them an edge, only to be told the real differentiator would be local knowledge of how regulations are applied, and an ability to negotiate with regulators on the ground. Ferma president Peter den Dekker acknowledges these efforts but told Post Europe last year that, in reality, 80% of this information is identical no matter who compiles it.
He suggests that compilation of a single database of objective and factual information around global insurance compliance would leave brokers and insurers to focus on building expertise on the more subjective local conditions, easing the management of global programmes.
Mike Stalley, chief executive of Fiscal Reps, comments: "There is general unease about whether the market is doing it right," although Russell Meagher, head of global programmes UK for Chartis, thinks there is so much focus on regulatory and tax compliance issues, that sight is lost of the reasons global programmes are bought.
Such programmes are certainly being purchased in increasing numbers, as they provide benefits such as economies of scale; greater control; more consistency; wider cover; non-standard covers; ability to monitor performance; and standardisation of the insurance process. "Corporates are buying consistency," argues Nigel Bamber, head of client relationship management at XL Insurance, which participates in around 1600 such programmes, up from 1400 a year ago.
But one complicating factor is that insurers cannot cover all risks under one policy, so have to issue a master policy, and local policies for subsidiaries. The alternative would be to buy in each locality. Karen Gorman, a partner in the global service team at broker JLT Specialty, comments: "The reason globals would not buy in each country is for control reasons. It would not give as much visibility, they would not know what was being bought and it might not tie in with the group's purchasing approach. There would also be no knowledge from claims. While it would be the only way of knowing you are fully compliant, the levels of cover would not be as wide."
Launching a central database, as recommended by Ferma — which could potentially reduce the costs of doing business without impairing competition — would be an attempt at achieving greater clarity, but what would be the extent of the knowledge base, the costs and management? Richard Robinson, network manager for Allianz Global Corporate & Specialty, says a factual database would be good, but the situation is always changing and local regulators make decisions without telling international insurers. He asks: "Where does the factual information finish and interpretation begin?" The latter is Allianz's competitive edge, he believes, "having our own network, knowing what is going on, not just reading the rules but interpreting them".
Risk of duplication
One option would be to create a separate, independent entity to hold and manage the data, along the lines of Perils AG, but Nigel Allen, its UK spokesman, comments that Perils only focuses on an amalgamation of losses from insurers across Europe, aggregating numbers: "What you describe sounds more complex."
A spokesman for the Association of Insurance and Risk Managers denies rumours it is putting together a database of insurance laws and regulation for its members, commenting: "This would be an enormous task and involve duplicating the work of others. However, we are about to unveil a best practice guide. This will contain practical advice on how to put together a global programme."
Most insurers and some major brokers use Axco for country information. Dave Sandeman, its director of operations, reports that Axco is already in talks with Airmic and Ferma. He stresses its independence — "the neutral mutual" — commenting that, within the insurance industry, there is no independent verifiable benchmark. He says the reason major brokers don't compile a database themselves is so they can focus on the information they need, as opposed to having to collect data more widely. But he also stresses Axco does not give advice: it supplies information and sends people around the world to gather it, and talk to the regulators.
Zurich's former CEO of global corporate UK David Martin has been quoted in the past as saying the lack of a "bible" on rules does frustrate customers, while stressing how quickly such rules change. But he also indicated Zurich was willing to evaluate sharing its data of regulations with brokers and risk management associations.
Tom Richardson, head of customer relationship management for global corporate at Zurich, says he too would support a central database but points to concerns around competition regulation. While local knowledge is not a point of competition, the difficulty is executing it. "You would need a lot of detail, as different licences are issued to different insurers. This is because when they apply for authorisation it is against specific criteria."
He adds that Zurich is working with Ferma and Airmic to devise an industry solution, and the next meeting is at the end of June. Zurich might make its own database available, at a price, says Mr Richardson but as to whether this could become the single database being called for would depend on the necessary scope and format required for other brokers' and insurers' requirements to meet the compliance needs of all customers. "The big question is whether to amalgamate databases or start afresh."
One stumbling block to sharing information would be the investment others have already made on the ground. Clive Hassett, director of operations at Ace Europe, thinks his company can deliver the factual and local knowledge itself. "It's our responsibility to make sure it happens." He struggles with the notion of a need for insurers to pool knowledge, but as to whether they should be competing on compliance, he says: "Not on public knowledge but we should on how we use it, and deliver on the regulatory requirements placed upon us for the insured."
Local knowledge in many territories is varied and often unclear, inconsistent or non-existent and Ace needs its own insurance companies on the ground, and strong partners, to do that, he adds. As to brokers, Matt Grimwald, head of structured risks for Miller, reports that it has decided to outsource to a third-party supplier ‚Äî whom he does not wish to name publicly at this juncture — on a pre-agreed contract, "but it is what you do with the information that is important".
This is echoed by Mr Hassett who says Ace uses Axco and builds on the factual knowledge; where issues or rules are unclear Ace has to make a judgment on how to do it. "Some may be happy with our approach but someone else might not agree."
However, Ms Gorman says there is a risk of clients getting conflicting advice, instancing the case of a major insurer telling a company it was authorised to write business in a particular territory, when her construction of the rules was that it was not. "The answer is often unclear." Mr Robinson agrees interpretation of rules around the world is difficult and reaching a consensus is tricky because of different priorities. Allianz has its own database for regulatory matters, but also uses Axco and then lawyers for advice.
Enhancing a factual database with local knowledge would go beyond compilation, and an industry-wide solution will never happen, because tax and other laws will never be aligned, says Ms Gorman. Fiona Raistrick, director of risk and regulatory practice at BDO Financial Services, adds that for a single database to work all companies' data would be needed for it to be comprehensive. "Any compliance regime is constantly moving across multi-jurisdictions and unless the database is run as a separate entity keeping an eye on changes would be difficult."
Ms Raistrick adds that comment on how laws are applied locally or how something is done in a certain jurisdiction does not mean it is right or that any guidelines devised could be relied upon. They would have to be legally scrutinised in the country in question, which would rack up the costs. "Would such a database be robust enough to be reliable all over the world and maintained?"
So, how much can clients reasonably expect? Richard Taylor, UK and Ireland managing director for HDI-Gerling, says: "We ensure clients are compliant as far as practicable," while Jens Wohlthat, its main board member responsible for international business, adds that the insurer subscribes to Axco and can also access high levels of information on the ground, but still needs expert knowledge relating to the actual contract.
"We have to ask if a single database would be reliable, and we would not contribute to another unless it was better or cheaper."
A fundamental issue, he continues, is whether insurers want to use such information as a differentiator. "We say there may be different solutions, all of which are compliant, but the client may want to do it differently." Having your own international network is crucial, says Mr Meagher: "I would not object to a factual database, but would not cede control of the local data. It's what differentiates us."
Setting up a global programme can be tricky, and even the established approach of combining admitted and non-admitted programmes, with difference in conditions and limits cover to fill in, are not safe from regulatory attack. Mr Richardson explains that some countries don't allow insurance to be sourced outside to protect the local market, so won't allow the claim to be paid to the subsidiary on a master policy. A 'financial interest' endorsement, which insures the financial interests of the parent company in a subsidiary is used, thereby shifting the risk from the country in which the subsidiary is located to the territory of the parent. "But it's a method of last resort and won't work if the corporate does not wholly own the subsidiary, such as in a joint venture," he observes.
"You start by understanding the client's specific business and the issues they face before inception," says Mr Hassett, "and where there are grey areas, such as whether any claim should be paid to the subsidiary or the parent, we advise on how to deliver it in a way that is legal and acceptable to the client. The worst thing is to put your head in the sand and, in the event of a claim, say: 'Sorry, we didn't structure the programme that way'."
As for delays in issuing policy documents, aggravating factors include each issuer taking a different view of compliance, which strengthens the argument for a single industry solution, says Mr Richardson. Local requirements add to this, such as in one country where the policy had to be re-done because it was in the wrong colour ink. Mr Hassett says it comes down to experienced people on the ground and sticking to service level agreements.
As to whose job it is to ensure the programme is compliant, Stephen Mooney, senior consultant with ID Risk, comments: "The service agreement between the global client and the broker is often silent on this issue and can leave the risk manager unsure of what he or she has to do and what they can rely on the broker to provide." Brian Kirwan, head of market management and communications at Allianz Global Corporate & Specialty, says these are service issues, and "if customers demand it you have to come up with a solution".
Insurance buyers view
In October, the Federation of European Risk Management Associations will be running a workshop on global compliant insurance programmes at its 2011 risk management forum in Stockholm. Risk and insurance managers attending the forum are among those most likely to be dealing with this issue because many of them work for multi-national companies, and Ferma has been looking for ways of facilitating a market solution.
One of the speakers at the workshop will be Helen Hayden, group insurance risk manager for Prudential, who is also a member of Ferma’s UK member association Airmic.
“Compliance is here to stay and the current pace of regulatory change shows no signs of abating either in the UK or overseas,” she tells Post. “The financial crisis has led to an increased scrutiny on the operations of all financial institutions irrespective of guilt and regulators, keen to be seen to have their own house in order, are unlikely to reverse this trend anytime soon.
“Insurance buyers are unwittingly caught up in this situation and have to deal with issues which, hitherto, have not been a high priority or face the consequences of non-compliance, which may range from fines and penalties, voiding of policies and non-payment of claims to loss of trading permissions or imprisonment in the most extreme cases.
“There are, in effect, three ways to construct what is loosely termed a ‘global programme’: a totally non-admitted programme with one policy issued in the domicile of the parent covering specified risks worldwide; a totally admitted programme with local policies issued in each territory by insurers licensed in each territory; or a combination of the two where local policies are issued where necessary, supported by a master ‘difference in conditions/difference in limits’ policy which may contain a financial interest clause.
“The features of each of these options are by now well documented and their benefits and drawbacks have already been widely discussed. Given that there is no overall insurance regulator and recent attempts to approach the International Association of Insurance Supervisors have failed, it seems unlikely that a system such as that acceptable in the European Union under the Second Non-Life Directive known as ‘Freedom of Services’ could be extended worldwide.
“The structure of each insurance programme is really a matter of discussion or debate between the buyer, insurer and broker; it should follow a full assessment of the risks in each jurisdiction and the insurance framework required to meet the needs of the insured in line with the regulatory requirements. Putting the programme together is a complex task and the time required to ensure this is implemented fully should not be underestimated. There are a whole host of matters that need to be considered and factored into the programme, and Airmic is producing a guide to assist its members in this area.
“One of the tools to assist risk managers in this task is a database, which Ferma president Peter den Dekker suggested at the association’s seminar in October 2010. While much of this information can be found in insurers’ and brokers’ proprietary systems, such a database would provide consistency in approach in providing a central location to host publicly available information. This would alleviate the need for risk mangers to consult a number of different sources to obtain the underlying data so necessary to construct a global programme.
“It cannot be stressed enough, however, that this is not intended to be a panacea for all ills. The regulatory rules in many territories are protectionist in nature or designed to protect retail customers as opposed to commercial entities and, therefore, do not necessarily bring the clarity that may be desired. Risk managers will still need to do their own due diligence to ensure their programme is compliant, but the database will provide the building blocks upon which the programme can be founded.
“The administration of a global programme requires global and local service, which encompasses policy issuance, premium collection, claims handling and other ancillary services. Appreciating the differences in cultures and acceptable market practice is key to understanding how the timing of such services may vary globally. In an ideal world, risk managers would like to be able to receive their local policy wordings in advance of inception date but in some territories this is just not how the process works; policies may not be issued until the premium is received, may not be issued in English or may have to be filed with regulators prior to issuance. Nevertheless, insurer and insured need to work together to ensure documentation is issued within an acceptable and expected timeframe. “Risk managers have to accept that regulatory and tax compliance is a large part of their day jobs, work with their counterparts within their own organisations, with external support from brokers and insurers and formulate their strategies to deal with this accordingly.”
- Home insurance insurtech Buzzvault launches
- Ed unveils CEO Hearn’s replacement and plots Bermuda office
- Roundtable: Is a single customer view taking off in insurance?
- Aviva promises to 'reinvent' insurance and end dual pricing
- Brightside winds up lawsuits under Brendan McCafferty
- CBL Corporation expected to be placed in liquidation, sees further delays to watershed meeting
- Hyperion hires CFO to replace Oliver Corbett