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Multinational programmes –

Exposures, Issues and Solutions

Presentation to SII/GIA Singapore

By Cameron McLisky

Regional Financial Lines Manager

Southeast Asia, China

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Outline

Who needs „Multinational solutions‟?

Increasing international claim exposures

Compliance risk

Coverage risk

Multinational insurance solutions

Q & A

3

Who needs Multinational solutions?

Why do they buy?

4

Looking for Consistent Loss Control Approach

Looking for Consistent Coverage Globally

Achieve Compliance

Companies with Multinational Operations (size)

Who needs Multinational Insurance solutions?

Multinational Programs provide coverage and services to corporate

customers incorporating exposure and service requirements in one or

more additional territories to that in which the parent is located.

5

Why Do They Buy Multinational Programs?

Local information – claims and policy

Local boards, executives

Lower Costs

Centralized Control

Compliance

6

What risks do I face as a Multinational?

Claims Risk

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Evolving international D&O litigation landscape

400

282

200

134

2007 2008 2009 2010

Non-US D&O suits (publicly available) increasing: Source: Aon

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Evolving international D&O litigation landscape

Largest Non-US D&O losses:

Rank Company Home Country Jurisdiction Total Paid

1 Unilever N.V Netherlands Germany $396m

2 Royal Dutch Shell Netherlands Netherlands $352m

3 Biovail Canada Canada $138m

4 Aristocrat Leisure Australia Australia $124m

5 Otto Group Germany Germany $104m

6 RIM Canada Canada $99m

7 Brookfield Multiplex Australia Australia $97m

8 Livedoor Japan Japan $81m

9 YBM Magnex USA Canada $56m

10 Sons of Gwalia Australia Australia $55m

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Claims activity and landscape, Southeast Asia & China

Thanachart Capital PCL Chairman and Executive Chairman Jailed (Thanachart Capital Public Company Limited : Mar 2010, Reuters, Thailand)

2 directors fined for wrongdoing (JEL and Lindeteves Jacoberg: May 2010, Straits Times, Singapore)

Chinese tycoon Huang Guangyu sentenced to 14 years in prison (Gome Electrical Appliance Holdings: May 2010, China Daily, China)

Company Director jailed for GST fraud (V-Teb Services Pte Ltd: July 2010, iras.gov.sg, Singapore)

Company director jailed and fined for manpower expenses (Goldrich Venture and Gates Offshore: Sept 2010, Channel News Asia, Singapore)

Ex-MD weeps over day’s jail and fine (Pancaran Ikrab Berhad : The Star, Oct 2010, Malaysia)

Ma Siu Kwan and company fined $10,000 for unlicensed dealing in securities (Hong Kong Business Agency Group Limited: SFC HK, Oct 2010)

Philippines partner of petroleum giant fined for oil leak (Royal Dutch Shell / First Philippine Industrial Corp: Deutsche Press-Agentur, Nov 2010, Philippines)

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Claims activity and landscape, Southeast Asia & China

Pheim Asset Management in Singapore – CEO guilty market rigging(Pheim Asset Management Sdn Bhd : October 20, 2010, Business Times, Singapore)

Anti-cartel suit filed vs. LPG Dealers in Manila (19 October 2010, Philippine Daily Inquirer)

Company director faces 46 charges of cheating Affin Bank of RM99.1mil in petroleum transactions (Affin Bank: The Star, Dec 2010, Malaysia)

Thailand SEC files complaint against UBS Securities Executive for dishonesty client trades (11 November 2010, Thai News Service)

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Evolving international D&O litigation landscape

Hong Kong

Regulators increasingly active – clear correlation in frequency and

severity of D&O claims

HK Securities and Futures Commission (SFC) - 161 cases 2007-2008.

In 2009-10 increased to 298.

Independent Commission against Corruption cases saw 27% increase

2010 over 2009

Taiwan

True class-action environment. Shareholder and Futures Investor

Protection Center (SFIPC) – government funded.

75 open claims, 25 successful cases.

Quantum's range from $100k to $5m.

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Evolving international D&O litigation landscape

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What risks do I face as a Multinational?

Compliance Risk

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Admitted vs. Non-admitted insurance

Many jurisdictions require insurance to be placed with locally

licensed insurers – „admitted insurance‟.

In many countries, especially for D&O and PI, laws are

undeveloped and unclear as to whether non-admitted insurance is

allowed.

Tie-in limits to a global master may be allowed, but some

countries specifically bar it.

DIC/DIL may be allowed, but some countries bar it.

Most programmes still written on a global/non-admitted basis

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Admitted vs. Non-admitted insurance

Penalties for breaching admitted insurance laws can apply to

insurer, insured and broker:

Case 1: Regulator in Argentina imposed fines in respect of

unauthorised (non-admitted) life insurance transaction – insured

fined 8 times insurance spend, broker 15 times the premium.*

Case 2: Swiss insurance broker purchased a compulsory PI policy

from a foreign insurer not admitted ins Switzerland. Swiss regulator

didn‟t accept it as a valid contract, and prohibited the broker from

practising in Switzerland.

* Source – Zurich Financial Services

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Tax

Some companies view tax as the key drive to buy compliant

multinational insurance programmes.

Insurance tax and income tax implications.

Premium tax may be payable where no local policy issued, if

global cover is applicable.

„Kvaerner‟ case

European Court of Justice ruled that Kvaerner had to pay Dutch

premium tax on its portion of a global PI policy that covered a

Dutch subsidiary, irrespective of fact that they didn‟t have a local

policy and didn‟t pay their parent any premium contribution.

If non-admitted insurance is bought, insurer won‟t want to pay

tax, and if insured does local tax regulators will be alerted.

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Tax

Potential for income tax issues where local paper not

purchased, e.g.:

Parent arranges global non-admitted policy, apportions premium

to overseas subsidiary but only pays tax in head office country.

Foreign subsidiary suffers $5m insured loss, but insurer,

unwilling to transact business in a non-admitted country, remits

payment to parent company.

Parent could be liable to pay income tax, as this is not their loss.

At 30% tax rate = $1.5m. If parent indemnifies subsidiary that

unit might have its own income tax obligation, as there is no

policy to apply the funds against. At 30% tax rate on the

remaining $3.5m = $1.05m. Total potential tax of $2.06m!

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What risks do I face as a Multinational?

Coverage Risk

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Corporate Indemnity

Close to 10% of countries worldwide bar corporate

indemnification of executives.

Over half of all countries don‟t have legislation specifically

addressing corporate indemnification.

Some legal view that a parent can contract directly with

executives of foreign subsidiaries to indemnify them, and it won‟t

be caught by a local bar on indemnification.

However, clearly much uncertainty about ability of executives and

subsidiaries to rely on local and parental indemnity.

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Policy Coverage

Relying on a single global policy ignores how local laws may

impact coverage, e.g.

In Italy insurers must provide 15% additional defence costs

limit on top of traditional aggregate limit.

In many countries (France, Sweden, Thailand, Taiwan, China)

policies must be written in the local language.

No Insured vs Insured exclusion allowed in Germany.

Most countries have specific legislation that must be

recognised in general and claims condition language.

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Multinational Solutions

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Controlled Master Programs

Freedom of Service Policy (FOS) - Europe

Non-Admitted Program

Fully Admitted Program

Multinational Solutions - Various Policy Options

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Fully Admitted Programs

Targeted Benefits Potential Disadvantages

• Fully legally and tax compliant

• Policy issued in local language and

meets all local requirements

• Local entity has local insurer office

they can talk to

• Local claims handling

• Cover will include any local

„anomalies‟

• Unfamiliar terms and conditions

• Generally higher rates, local

experience rated

• Local conditions / warranties might

apply

• Lack of flexibility in policy language

• Premium may be required for

coverage to be effective

Local operations purchase locally admitted coverage as needed

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Non-Admitted Programs

Targeted Benefits Potential Disadvantages

• One single policy – centralized

control

• Flexible rates

• Familiar terms and conditions –

consistency

• Ease of administration

• Absence of currency and language

problems

• Local service can be difficult or non-

existent

• Premium is not tax deductible locally

• Paid losses may be subject to

income tax

• Fines and penalties

• Non-compliant in the majority of

countries!

Extend coverage from domestic policy responding to losses outside of

home country territory

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Freedom of Service (FOS) Europe

Targeted Benefits Challenges

• Fully Admitted EU countries plus three

• Fully legal and tax compliant

• Single policy covering multiple

territories

• Reduced distribution costs – no

minimum premium to issue paper in

every territory

• Single point of change for policy

endorsements

• Single policy covering multiple territories

• No uniform cross-EU insurance regulations

• Unclear what laws & regulations apply to

FOS policies issued in another Member

State

• No central “amendatory endorsements”

library

• One central premium collection with

multiple IPT declarations and payments

• Compliance with local pools, for example,

Consorcio/Cat Nat or terrorism,

• Local language certificates

• Local claims handling – not suitable for high

frequency programs

Insurance contract placed in one EU/EEA country is valid in all countries in

both regions.

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Controlled Master Programs

Targeted Benefits Challenges

• Fully legally and tax compliant - in all

countries

• Policy issued in local language and

meets all local requirements

• Local entity has local insurer contact,

supported by global relationship

• Local claims handling, global

claims/loss reporting

• Consistent broad coverage through

Master Policy Difference in

Conditions/Difference in Limits cover

• Global leverage – pricing/priority

• Insured information capture

• Timely communication & coordination:

– within Insured globally

– Between Insured, Broker's) and

Insurer (locally/globally)

Master policy with extended coverage for territories outside of home

countries. Locally admitted policies agreed as needed by insured, broker

and insurance carrier

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Controlled Master Program

Program Design

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Controlled Master Programme Options

Option 1

Indemnity Agreement

Option 2

Passport Endorsement

Option 3

Tie-in of Limits Endorsement

Method used to share a single

worldwide aggregate.

The only option for clients

requesting limits in the aggregate

grater than USD 200M.

Parent Corporation to execute

an Indemnity Agreement prior to

binding.

Provides a single worldwide

aggregate limit of liability.

Master Policy terms, conditions

& exclusions govern the economic

relationship

Credit analysis required.

Governs the intention of the

Passport program.

In all events, maximum amounts

insurer will pay is the limit of the

Master Policy.

If claims paid under the

underlying policies and the Master

policy exceeds the aggregate limit

of the Master Policy – the Policy

holder is responsible for

reimbursing insurer the amount in

excess of the aggregate Master

policy limit.

No Tie in of Limits required.

Underlyers & Master policy

aggregate limits manageable in

size

Tie – in of Limits endorsement

applied to every underlyer & Master

policy.

No Indemnity Agreement or

Passport structure required.

This option is subject to underlyer

policies each having a low limits (eg

USD 5M) with a total program

aggregate (Master plus all

underlyers) of a manageable size.

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Indemnity Agreements

Where there is no re-imbursement where the underlyer provides

wider coverage than the Master

Allows the Insured to gain the benefit of wider coverage on a

local underlyer than on the Master

AP charged if there is a significant increase in cover/risk

Endorsement must be added to the Master to ensure that the

wider coverage cannot be applied to this policy

Re-imbursement where the underlyer provides wider coverage

than the Master

The parent company is liable for any claims paid out where the

local underlyer has wider coverage than the Master.

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Difference In Conditions / Difference In Limits

Difference In Conditions (DIC)

If the standard of the local cover is different, then the “top-up” cover

provided by the global programme (Master Policy) is called Difference in

Conditions Insurance.

Difference In Limits (DIL)

If the sum insured or local policy limits are different, then the “top-up”

cover provided by the global programme (Master Policy) is called

Difference in Limits Insurance.

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Intended to extend coverage on Local Policies and apply Master Policy Terms &

Conditions locally (where legally permissible)

Can be used without additional premium

Applied to Master Policy only

No need to use tie-in of limits on local policies

Provides excess coverage where local policy limits are lower than the Master

- this will be paid to the Parent Company where legally permissible

DIC Endorsement

DIC/DIL Endorsement

Intended to allow local Insured to access full limits applicable to Master Policy

when Local Policy limits are reached (where legally permissible)

In practice DIL will allow insurer to pay claims to the Parent Company. It is usually not permissible to pay claims under the DIL directly to the Local Insured if an admitted policy is

required.

If DIL is used then additional premium is required - if we do not apply additional premium to the local policies it could potentially raise issues should we pay a claim into the local

territory in regards to a) tax and b) cost of capital

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Function of the Master Policy incl. DIC/DIL

Explanatory Note:

DIC = Difference in Conditions

DIL = Difference in Limits

Integrated Local Policy

Master Policy Limit

Local Policy Limit

Agreed deductible

per each claim

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Tie-in of Limits – Key Issues

Likely to be most common structure for multi-national

programmes.

Parent company has a master policy and each foreign

subsidiary has a local policy with the limits all tied-in, so

that the global aggregate is no greater than the limit the

parent company buys.

Good for insurer – solves capacity issues.

Good for insured – premium savings, but is an admitted

programme. DIC/DIL can cover gaps in cover and limits,

and policies are the local version and filed.

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Tie-in of Limits – Key Issues

But…

Some countries don‟t permit DIC/DIL (including Brazil,

India, Argentina).

Some countries don‟t permit tie-in of limits.

Full limit loss by parent will exhaust cover for subsidiaries.

DIL payments to parents may have tax issues.

Administration fees can add up.

Solutions..

Separate parent agg and one agg for subsidiaries.

Admitted Side-A only policies in each country

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Premium Allocation – Considerations

Underwriting Factors Country Factors

• Major Line

• Minor line of business

• Premium Exposure/Rating

base

• Risk Factors

• U/W Factors

• Claims‟ Experience

• Compulsory local retention

• Tariff rates

• Local premium must be consistent

with local underwriting practice

• Local override

• Minimum Premium?

• Insurer and Reinsurer Payable taxes

• Exportability of premium & PPWs

• Premium reserves

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Tariff Rated?

Local Pools &/or reinsurance requirements

Local Taxes & premium exportability

Licensed line of business?

Insurer-owned network?

Country Specific Considerations include:

Manuscript vs Local Standard?

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Countries to watch out for – include;

BRAZIL

INDIA

PAKISTAN

BANGLADESH

RUSSIA

CHINA

EGYPT

NORTHERN CYPRUS

SOUTH KOREA

JAPAN

PUERTO RICO

AUSTRALIA

CANADA

US

MALAYSIA

NORWAY

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Countries to watch

India

All risks located in India must be insured by a locally admitted insurer - Non-admitted insurance is not allowed.

Issuance of underlying policies by non-admitted insurers is not allowed.

Claims cannot be paid or adjusted unless a local policy is in place.

A specified mandated portion of every risk has to be obligatorily ceded to the General Insurance Corporation of India (GIC), the National Reinsurer.

Brazil

All risk located in Brazil must be insured by an Admitted company;

Non-Admitted insurance is strictly prohibited;

Issuance of underlying policies is not allowed;

Claims cannot be paid or adjusted unless a local policy is in place.

In addition, in Brazil all reinsurance must be done by the Brazilian Reinsurance Monopoly (IRB):

Non-compliance - for the Insured, fines up to the sum insured or reinsured;

Non-compliance - for the Insurer, sanctions may be applied, ranging from simple warnings to suspension or cancellation of operating license.

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Controlled Master Program

Submission Quote Bind Implement

Program

Review

ProgramRenewal Plan

90-120 Days

> Before

Effective

30 Days >

Before

Effective

On or

Before

Effective

4040

Chartis is a world leading property-casualty and general insurance organization serving more than 40 million clients in over 160 countries and jurisdictions. With a 90-year history, one of the industry‟s most extensive ranges of products and services, deep claims expertise and financial strength, Chartis enables its commercial and personal insurance clients alike to manage virtually any risk with confidence.

Chartis is the marketing name for the worldwide property-casualty and general insurance operations of Chartis Inc. For additional information, please visit our website at www.chartisinsurance.com. All products are written by insurance company subsidiaries or affiliates of Chartis Inc. Coverage may not be available in all jurisdictions and is subject to actual policy language. Non-insurance products and services may be provided by independent third parties. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds.

The data contained in this presentation is for general informational purposes only. The advice of a professional insurance broker and counsel should always be obtained before purchasing any insurance product or service. The information contained herein has been compiled from sources believed to be reliable. No warranty, guarantee, or representation, either expressed or implied, is made as to the correctness or sufficiency of any representation contained herein.

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