Look before you leap across that border

THE NEW
FRONTIER
Look before you leap across that border. Small and middle-market clients
must prep before taking their business overseas.
[ By Cheryl Arvidson | Illustration by Edel Rodriguez ]
LeadersEdgeMagazine.com
12
Border Crossing
By Cheryl Arvidson
A
A multinational pipeline company involved in a two-year project in the
Dominican Republic purchased its own equipment coverage directly from
a local insurer. Shortly after the company renewed the policy for a second
term, an electrical fire destroyed a $450,000 trenching machine.
When the pipeline company presented
broker and insurance company have
its claim, the Dominican insurer denied
adequate global networks so that their
it, saying its underwriter had failed to
broker can advise on coverage and their
buy the necessary reinsurance. The cliinsurance company can have the ability
ent turned to its regular insurance broker,
to provide locally admitted solutions at
Hunter Keilty Muntz & Beatty (HKMB),
a competitive price,” says Christopher
for help, but as T. Neil Morrison, CEO of
Sparro, president of AIG WorldSource,
the Canada-based company, says, “We had which serves the property, casualty and
little impact on the Dominican insurer’s
specialty risk needs of U.S. and Canadastance from Toronto.”
based companies with operations overHKMB contacted one of its partners in
seas, as well as foreign companies with
an international broker network that had a
operations in the U.S.
relationship with the Dominican insurer,
The way business is conducted and the
understood the local business nuances
way insurance is transacted and underand was able to intervene
written varies from country
to get the matter resolved
to country. “It is a whole
l Fast focus
promptly and fairly.
different ballgame insuring
l Small and mid-sized
“The lesson here is to be
business in India than it is in
firms expanding in
sure that in every jurisdiction
the UK,” says Richard Alexforeign countries face
where you have clients operatander, vice president of AIU
new risks, a maze of
ing, you also have, and use,
Small Business Solutions.
insurance requirements
a local broker relationship,
AIU manages AIG’s overseas
and the potential for
coverage gaps.
hopefully before you have a
property-casualty operations,
problem,” Morrison says. “Our
and the small-business unit
l International networks
client now has us procure their
serves organizations with 100
help brokers establish
international coverage, and we
or fewer employees and up to
local ties in foreign
use our network partners. But
$25 million in revenues. “But
countries.
this is a real-life example of
as the world becomes more
how good relationships make
educated and more wealthy,
all the difference when operating outside
it has been a real incubator for small to
one’s home country.”
medium-sized businesses,” he says.
As more small and middle-market companies look to take their business into the
International Insurance Needs
global marketplace, issues such as the local
Insurance needs for businesses expanding
culture, the political environment and difacross borders can range from a simple busifering laws and insurance requirements
ness travel accident policy to a number of
in the countries where they are heading
locally admitted policies that are part of a
become major considerations.
controlled master program, ensuring there
Daniel Walsh, senior vice president and
are no gaps in coverage between countries.
international practice leader for WachoIn some foreign countries, a U.S.-based
via Insurance Services, says one of the
admitted policy for property and general
biggest changes he has witnessed in the
liability coverage is accepted, but other
international marketplace is the growth of
countries may require coverage to be placed
international broker networks that serve as
through a locally admitted carrier. Coverin-country risk managers for U.S. companies age in those local policies often varies, so
expanding overseas.
a difference in conditions (DIC) policy can
“It is essential for small and mid-sizedensure there are no unexpected surprises
business owners to make sure that their
when a claim arises.
13
October 2007 Executive Report
“Each country has different compulsory regulations, not unlike our requirements here in the United States,” says
Jim Gervang, vice president and director, international risk services, for ABD
Insurance & Financial Services. “You are
required by law in the U.S. to purchase
workers compensation insurance, and
it has to be purchased from a carrier
licensed to issue policies in the state
where you are doing business. If there is a
company auto, you are required by [some]
states to buy automobile insurance. Countries outside the U.S. have similar requirements usually relating to work injury or
auto exposures. Even in the European
Union it is not uniform.”
Just as U.S. and Canadian brokers need
a strong network around the world, so,
too, do international brokers whose companies are seeking to do business in North
America, says Jan Tomlinson, executive
vice president and international field
operations manager for Chubb.
“Twenty years ago, if a German company opened a manufacturing facility
in the U.S., they would try to find a
U.S.-based agent to handle their U.S.
exposures,” she says. “But today, the
company’s German broker would be more
likely to have an affiliate relationship
with a U.S. agent who would place the
required local policies, and the German
broker would manage the controlled master program.”
Most small and mid-sized U.S.-based
businesses operating on a global basis fall
into two categories, each with different
insurance needs, says Sparro. The first
consists of traditional “brick-and-mortar”
‘The initial
challenge to
a business
is getting
the right insurance
in place.’
— Christopher Sparro, President of
AIG WorldSource
entities that establish a manufacturing
presence overseas to take advantage of
lower costs. Second, “mind and management” businesses employ a global sales
force to sell their products in a number of
different countries.
For a brick-and-mortar operation, the
company’s needs traditionally include
property-casualty policies and may
include other products such as business
interruption coverage, auto insurance,
inland marine and/or ocean marine coverage and perhaps excess liability and a
type of workers compensation program.
For the companies that are building revenue through a traveling sales force, the
needs may include travel coverage, health
coverage and possibly some specialty
lines such as kidnap and ransom/extortion, political risk, product recall and
trade credit.
“I think the initial challenge to a business is getting the right insurance in
place,” Sparro says. “Businesses need to
make sure that their policies are adequate
to meet their exposures. They also need to
Looking for Growth Abroad
It’s not just multinationals reaching across international borders to build their
businesses. Nearly 97% of U.S. exporters are small enterprises—which the U.S.
Department of Commerce defines as fewer than 100 employees—and mediumsized businesses (between 100 and 500 employees). The number of small and
medium-sized exporters more than doubled between 1992 and 2003. A study published in July by the Economist Intelligence Group found that 58% of U.S.-based
middle-market companies—defined in the study as businesses with revenues
between $25 million and $1 billion—expected to see the most growth for their
business from overseas markets.
LeadersEdgeMagazine.com
14
buy coverage in a compliant manner, pursuant to local regulatory requirements.”
AIG WorldRisk, for example, is an
international commercial package program that allows a U.S. or Canadian
based company operating overseas to
choose from a menu of coverages including foreign commercial general liability,
commercial auto, voluntary workers compensation, commercial property, marine
ocean cargo, commercial crime, kidnap
and ransom/extortion, political risk, and
foreign travel accident and sickness.
Health coverage for work-related injuries is particularly important since many
countries have government-funded health
care and the U.S. workers compensation system does not provide coverage in
foreign countries. For example, if a U.S.
employee were seriously injured while on
a business trip in Europe, the individual
might have to pay up front before getting
any treatment at a hospital or incur a huge
bill if it was necessary to be airlifted to
another location for treatment. Brokers
and insurance carriers with good networking relationships overseas can ensure
specialized health coverage policies are in
place to handle any medical emergency.
Some businesses look before they leap,
but some just leap, not recognizing that
the way they have been insured for years
in the U.S. won’t suffice overseas.
“If you are a U.S. manufacturer that has
been in business for many years, you will
probably have a package policy in place,”
says Chubb’s Tomlinson. “But if you decide
to open a manufacturing plant in China,
those policies you have in place in the U.S.
aren’t going to provide all the protection
your company needs in China. In addition,
there will be local regulations that dictate
how policies can and can’t be written.”
ABD’s Gervang emphasizes the importance of advance planning and good communication. “The client needs to come
to us as soon as they’re thinking about
expanding outside the United States so
we can help plan a strategy with them in
advance,” he says. “As complicated as it is,
put a multiplication factor in it if it is done
after the fact. You can still get it done, but it
takes everybody twice as long.”
Border Crossing
Unexpected Risks
Cultural differences also are an issue for
businesses expanding overseas.
“Some of the biggest faux pas that can
come into play for a new company involve
not understanding the rite of business
culture that goes with operating in a new
foreign environment,” says Wachovia’s
Walsh. “There have been legions of books
written on how to carry oneself in presenting oneself. It can have an impact on the
credibility that a foreign business operation will give you.”
Plus there is an element of political risk
that U.S. businesses need to factor in—the
confiscation, nationalization or expropriation of a business’ physical assets by the
host government.
“That’s what Venezuela is doing now and
what Cuba did,” said HKMB’s Morrison.
Insurance may not provide full financial protection against a government confiscating property, but it can help.
“Rarely can you transfer the full fiscal
event off your balance sheet, but you can
insure a meaningful component in the
event your assets are confiscated. You
would be able to at least diminish the
financial result,” Walsh says.
Kidnapping is also a very big consideration, and the insurance, depending on
where you are, is relatively inexpensive,
Morrison says. “For any business that has
people traveling to second- or third-world
countries, it is an absolute.”
Two other areas of political risk most
U.S. businesses are unaware of involve
currency inconvertibility and trade credit
exposure. The first occurs when a government makes changes in its governing
currency laws that leave a foreign business holding the wrong type of currency
and unable to pay its debts. The second
involves a sale from a foreign-based operation to another country that ends up in
default. The proper insurance can help
mitigate those losses, too.
In addition, Sparro says, AIG is beginning to see more businesses express an
interest in purchasing locally admitted
policies for specialty lines coverage, such
as directors and officers liability, errors
and omissions, and excess casualty.
Compliance Issues
One of the challenges for multinational
businesses is ensuring that their insurance
program complies with the ever-changing
regulations of each country. Premium tax
rules can be ambiguous and contradictory,
and depending on the country, the insurer,
broker or insured may be responsible for
paying them.
“What I have seen in five years is a
shifting of the landscape as far as legislating and regulation of insurance,”
said Mario Vitale, CEO of Zurich Global
Corporate in North America. “That has
required a great deal of staying on top of
what is happening in different countries,
particularly when it comes to premium
taxes and licensing, and even rules and
regulations on forms. It really has become
more complex.”
An insured needs to be confident that
its policy’s coverage provisions are correct and enforceable in each country, says
Alan Fairhead, chief underwriting officer
for Zurich Global Corporate. “You want to
have that up front, not work it out when
something happens.”
A Zurich program for multinational
companies includes a reporting system
that breaks down exposures by country,
documents an insured’s compliance with
the licensing regulations in each of those
countries, and details all of the foreign
premium taxes owed and distributed on
their behalf.
Compliance challenges and other risk
issues become increasingly complex as
small and mid-sized businesses expand
their foreign operations.
“They won’t stay small, not if they’re
successful,” said ABD’s Gervang. “They
may start with one or two countries, but
they have regional growth plans that will
help them grow throughout Europe or
elsewhere. Or they may manufacture in a
few countries and distribute to others to
start. But there is a plan for growth, and
their personal insurance program and
their exposures increase as they grow
those manufacturing risks.”
By Cheryl Arvidson
U.S. Exporters by
Business Size
Small
3%
7%
Medium
Large
90%
Source: U.S. Department of Commerce
Growth in Number of
Small and Mid-Sized
Exporters
0
50
100
150
200
250
300
350
1992 108,026
2003 218,382
0
50
100
150
200
250
300
350
Source: U.S. Department of Commerce
Where U.S. MiddleMarket Companies See
the Most Growth
0
50
100
Latin America: 8%
Europe: 12%
Asia/Pacific: 29%
Not applicable: 42%
(only conduct
business
in the U.S.):
150
200
250
300
Africa: 1%
Middle East: 3%
Canada: 5%
Arvidson is a contributing writer.
Source: Economist Intelligence Group
[email protected]
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