Multinationals segment risks to fight rate hikes

Some multinational businesses are rethinking their global insurance programs and carving out certain lines of coverage in a bid to save money as rate hikes and capacity constraints persist. 

But buying coverage locally in a specific country or region in which a business operates, rather than a global program that covers its exposures worldwide, may lead to coverage gaps and more price volatility in the long term, experts say.

Global programs are generally the most efficient and cost-effective way to manage global risks, but after 23 consecutive quarters of rate increases, some buyers are looking to structure their programs differently, said David Rahr, Chicago-based global leader of multinational at Marsh LLC. 

Multinational companies with global property programs including Asia may decide to carve out earthquake exposures in a country like Japan, where coverage is less costly, and buy local policies to increase limits, he said. 

Property rate increases in Asia have trended at around 2% in recent quarters versus 4% to 8% in other markets around the world, Mr. Rahr said.

“We’re seeing more and more clients take advantage of regional differences in terms of price,” he said.

Large multinational companies are also retaining more risk and putting more business into captive insurers, experts said (see related story below).

The property insurance market remains challenging, with constrained capacity and higher pricing, especially for catastrophic coverages, said Jared Hanner, Los Angeles-based executive director of the real estate and hospitality practice at Arthur J. Gallagher & Co. 

Many multinational companies based outside the United States are carving out the U.S. specifically, Mr. Hanner said. “Because they can’t obtain the catastrophic coverages on their global program, they’re willing to access U.S. markets,” he said. 

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Another issue is that some excess and surplus lines insurers can only cover U.S.-based risks, Mr. Hanner said.

“Sometimes it makes more sense to carve out the U.S. to build up those higher capacity limits and cover the international separately,” he said.

Carving out coverage based on price might be beneficial in the short-term, but “is it available next year?” said Steve Bauman, New York-based global programs and captives director, Americas, at Axa XL, a unit of Axa SA.

“In any given year maybe there’s an advantageous price in a local market, but it could be very fleeting,” he said.

Risk managers should scrutinize what coverage a local program provides versus what a global, coordinated program offers, because there can also be coverage inconsistencies, Mr. Bauman said.

At certain times in the market cycle, buying property coverage locally may come at reduced cost, said Manny Padilla, New York-based vice president, risk management and insurance, at MacAndrews & Forbes Inc. and a Risk and Insurance Management Society Inc. board director.

“There are definitely situations where you can carve out or completely exclude exposure in a global purchase and then pursue it locally. But the counter argument to that is global pricing really doesn’t change that much,” Mr. Padilla said.

Buying coverage on a global basis offers economies of scale, said Brian McNamara, Bermuda-based global head of captive solutions and regional head of multinational, North America, at Allianz Commercial, a unit of Allianz SE.

“There can be a little more freedom around premium allocation globally,” Mr. McNamara said. If a global cyber program were to carve out a specific country or region, that might “push up the cost of the program,” Mr. McNamara said.

Broader coverage can also be negotiated with a global program, which tends to be over and above what local markets can provide, he said.

If a policyholder has an underlying policy outside of a global program, often the language in the policy states that it will act as if the same amount of coverage was purchased under the master policy, said Andy Zoller, Dallas-based head of international programs for U.S. commercial insurance, at Zurich North America.

Global programs are typically structured with a master policy that sits over the worldwide risks for a particular company and individual local policies issued in the various countries in which it does business.

For example, if a policyholder buys $500,000 of liability limit in Mexico and it has a $1 million limit on its master policy, but the two are not coordinated, there might be a $500,000 gap, Mr. Zoller said. 

“I wouldn’t want to sit there as an insured and worry about that. I’d much rather have it all coordinated in one program,” he said.

Difference in conditions and difference in limits clauses in master policies fill coverage gaps if local policies have different coverage terms, said Marco Hensel, Chicago-based underwriting lead at HDI Global Insurance Co., part of HDI Global SE. 

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Global buyers access captives to coordinate coverage, reduce costs

Multinational businesses are increasingly using captive insurers alongside their global insurance programs to coordinate coverage across their subsidiaries and reduce their total cost of risk, experts say.

More multinational companies are forming captives, including in Asia-Pacific and Latin America, said Michael Serricchio, Norwalk, Connecticut-based managing director of Marsh Captive Solutions,
a unit of Marsh LLC. 

Some countries that experienced a lag in the hard market seen in the U.S. and elsewhere are now starting to see it, which is driving greater captive growth, Mr. Serricchio said.

Captives are being formed in smaller countries, such as Chile, Mr. Serricchio said. 

Cyber, financial lines and directors and officers liability are some of the lines of business that are growing in multinational captives, said Brian McNamara, Bermuda-based global head of captive solutions and regional head of multinational, North America, at Allianz Commercial, a unit of Allianz SE.

Pricing and a lack of capacity in certain lines of business are driving captive growth, Mr. McNamara said.

An international program backed by a captive provides compliance across multiple countries and allows businesses to actively manage their risk, said Jason Tyng, Chicago-based lead of the U.S. captive solutions group at HDI Global Insurance Co., part of HDI Global SE.

“If you have a high enough risk tolerance you can leverage some of the cost from the increase in the international program and the market going haywire,” Mr. Tyng said.

Cross-border exposures, such as supply chain concerns, are rising, said Steve Bauman, New York-based global programs and captives director, Americas, at Axa XL, a unit of Axa SA. “Businesses are trying to understand the business interruption of supply chain as it relates to their operations around the world,” he said.