1. Involving Your Captive in Multinational Programs
Salil Bhalla
Andrew Baillie
Head of Global Fronting EMEA
Program Director, Global Insurance – Property
AIG Global Risk Solutions
The AES Corporation

2. Speaker Information
Salil Bhalla, AIG Global Risk Solutions Head of Global Fronting EMEA
Salil joined AIG over 20 years ago and has held several roles in Bermuda, Continental Europe and the UK focusing on captive and multinational programs.
Andrew Baillie, The AES Corporation Program Director, Global Insurance – Property
Andrew has been working with AES since 2006 and oversees a large multinational property program that involves over $50bn of assets in more than 20 countries.

3. What to Expect
After attending this session, participants will gain a better understanding of:
How to implement and manage a global captive fronting program
Using a captive as a vehicle to finance and manage internal risks
Overcoming the inevitable challenges of a global program
The importance of managing the claims process
To create objectives targeted to the audience and desired level of learning/thinking:
1. Ask yourself whether you want attendees to be able to: know, apply, integrate, consider the human
dimension, care, learn to learn, comprehend, apply, analyze, synthesize, or evaluate .These outcomes
represent different levels/kinds of thinking.
2. Match your action words to the desired level of learning/thinking (see Presenter Tips #1 at end of presentation template)
3. Match learning objective with appropriate teaching/learning strategy (see Presenter Tips #2 at end of presentation template).

4. The Theory of Using a Captive for International Risks

5. “I think there is a world market for maybe five computers.”
– Thomas Watson, Jr., Founder & Chairman of IBM, 1943
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6. Coverage Options for Multinational Companies
Three main options for multinational companies to obtain cover for foreign exposures.
Controlled Master Program (CMP)
Local
Global
Ways to address multinational risks
Policies issued in countries to cover local exposures. Each local policy is issued by an insurer licensed in that particular country.
Policies issued in the client’s home country covering its worldwide exposures. Global policies are issued by insurers licensed in the client’s home country
A CMP includes both local policies and a master policy providing worldwide coverage.
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7. What Is a Fronted Program?
A form of reinsurance or indemnification whereby a commercial insurance company (the “fronting company”):
Issues an insurance policy to an insured, and then
Fully or partly transfers this risk either through a reinsurance agreement with the insured’s captive or an indemnification agreement with the insured or its parent company.
This arrangement is typically put in place when a company needs to:
Meet a regulatory requirement for locally admitted policies, or
Evidence insurance for other business reasons but wants to retain all or a portion of the underwriting risk.
The fronted program provides local certificates and evidence of insurance to help satisfy compliance, lender or other requirements.
A fronted program allows for claims to be handled and settled locally.
The fronting company charges a fee to assume the credit, operational and regulatory risk inherent in the issuance of a policy.
Explains our fronting business : what it is. Why customers need it, cost
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8. Lines of Business for Captive Programs
Property / Business Interruption
Automobile (Liability & Physical Damage)
General & Products Liability
Workers’ Compensation & Employers Liability
Fidelity
Professional Liability / E&O
Extended Warranty
Aviation
Surety
Marine
EIL
Employee Benefits
Emerging Risks such as Cyber
Products GRS can front
Concept is to show we can front traditional and emerging risks
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9. Involving a Captive in International Risks Takes Time and Work
Inception
Oct
Nov
Dec
Jan
Feb
Appointment process
Agree on service requirements
Understand program placement strategy
Finalize fronting requirements
Agree on premium allocation methodology
Overseas network instructions
Finalize service plan
Agree on premium allocation/cash flow
Finalize policy documentation requirements
Agree and issue claims protocol
Completion of legal documents and collateral instruments
The suggested timeline to implement a fronting program
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10. And There Are Challenges
Insurance/reinsurance regulations in each country
Restrictions on the exportation of risk
Cash before cover territories
Tax considerations
Compulsory covers and pools
Rules governing policy wordings
Currency restrictions
The need for compliance
A reference to the range of advice that GRS and Multinational can provide on local country regulatory requirements
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11. Special Country Requirements* – BRIC
China
Russia
Reinsurance restrictions
80% maximum cession
Manuscript wordings difficult
Need for local retention and reasonable reinsurance commission
Brazil
India
Select country requirement – difficult territories to front
Subject to change
Compulsory 40% reinsurance cession to local market
Registered reinsurers required
Offer reinsurance to local market
Application for cash transfer
*As of December 31, 2012.
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12. Reinsurance
Kazakhstan:
New local retention requirements passed January 2012.
Germany:
The German Pharmaceutical Act was recently amended to require reinsurance cessions and retro-cessions under local and Freedom of Service policies covering German pharmaceutical risks to be ceded to “independent” reinsurers.
India:
Effective April 1, 2012, the Indian Regulator will require overseas reinsurers to submit information on their management, financials, and home licensing prior to accepting any insurance/reinsurance or retrocessions from India.
Brazil:
In 2011, local regulations governing the exportability of reinsurance took effect.
Kenya:
A compulsory 18% cession of all treaty reinsurance has been extended until December 31, 2015.
Examples of reinsurance regulations impacting fronting business – subject to change
Argentina:
2011 regulatory changes restrict reinsurance exportability outside Argentina, and limit foreign currency exportability.
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13. Cash Before Cover
Ethiopia:
The Federal Government of Ethiopia has implemented a new “No Premium, No Cover” rule, by which insurance policies issued without full collection of the premium are considered void.
CIMA:
As of October 1, 2011, the insurance law that governs in 14 countries in Africa has been amended to include a “cash before cover” requirement.
Taiwan:
The Taiwan Non-life Insurance Association (“NLIA”) is pushing for the implementation of cash before cover for auto insurance to take effect in 2013.
Nepal:
While already in application, the Regulator only recently started to tighten the cash before cover requirement in Nepal.
Nigeria:
Effective January 1, 2013, Nigerian insurance policies may only be issued once the entire corresponding premium has been collected.
Panama:
On April 3, 2012, Panama implemented a new insurance law
that sets forth certain requirements related to premium payments.
Examples of cash before cover countries – subject to change
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14. Taxes
Europe:
While Romania and Italy had tax decreases in some areas, increases were noted in Cyprus, Denmark, Finland, Hungary, and the Netherlands 
Canada:
The Canadian Tax Authorities in the province of Manitoba have announced that premiums received for policies incepting or renewing on or after July 15, 2012 will be subject to a retail sales tax of 7%.
Guatemala:
Guatemala’s Reinsurance Tax increased from 3.1% to 5%, effective January 1, 2013.
Honduras:
Effective April 30, 2012, a reinsurance “transfer” tax of 0.15% applies to reinsurance premiums paid to overseas reinsurers
Australia:
Effective October 1, 2012, the Australian Capital Territory state government enacted a phased reduction in stamp duty rates on all insurance policies until July 1, 2016, at which point all policies will be exempt.
Israel:
Effective September 1, 2012, the tax on commissions paid to Israeli brokers was increased from 16% to 17%.
Nicaragua:
Effective January 1, 2013, all reinsurance transactions, including assumed reinsurance from a local carrier in Nicaragua, are subject to a 1.5% reinsurance tax.
An example of tax implications in various countries – subject to change
Colombia:
Effective August 22, 2012, a new 2% Fire Brigade levy applies to insurers that issue property and energy policies covering petroleum, mining, or petrochemical companies.
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15. Compulsory Coverage Examples of compulsory cover – subject to change
Russia:
Owners of “hazardous facilities” in Russia are subject to new
compulsory insurance requirements.
Germany: Effective January 1, 2013, the law requires financial investment intermediaries to be covered by professional liability insurance with minimum limits. There was a transition period until July 1, 2013, by which date these intermediaries must have this cover in effect.
Switzerland:
A proposal for a mandatory earthquake insurance bill was presented to the Swiss Federal Council in March 2012.
Uzbekistan:
Motor TPL cover is compulsory in Uzbekistan with a current limit of USD 3K. The Ministry of Finance has recommended that this limit be increased to USD 5K.
Korea:
A new law requires each occupant of a multi-tenant building to insure their liability for the spread of fire.
Czech Republic & Slovakia: Following the implementation of the European Environmental Liability Directive (ELD) in 2007, a compulsory financial security for certain operations is required.
Examples of compulsory cover – subject to change
Azerbaijan:
In 2011,Compulsory Property coverages were established in Azerbaijan.
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16. Manuscript Wording
Honduras:
Manuscript policies must be filed and approved by the regulator before use, UNLESS the local policy is issued as part of a multinational program and is reinsured 100% overseas.
Thailand:
All manuscript wordings must be filed and approved by the local regulator before they can be used for new and renewal accounts.
Brazil:
Although not prohibited by law, the local regulator is making it more difficult for insurance companies to file and approve manuscript wordings.
Examples of countries with manuscripting Limitations
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17. Enforcement Actions
Switzerland:
Swiss law requires brokers to be covered by professional indemnity insurance
In 2009, Swiss authorities voided a professional indemnity purchased by a Swiss broker from a foreign insurer
The broker was subsequently not admitted to practice in Switzerland
Brazil:
U.S. company sold life insurance through hundreds of local agents without a license for at least 10 years
Brazilian regulator (SUSEP) assessed a fine of USD $6.2 billion in late 2011
SUSEP indicated it is investigating 10–20 foreign insurers and plans to bring legal proceedings shortly
India:
In 2011, the Indian Tax Authority taxed an Indian subsidiary of a German company for claim payments received under its German parent company's master (or global) policy
The Authority's investigation revealed that the claim payments to the parent were for losses suffered by the subsidiary for a fire at its warehouse in India
The Authority argued that the claim payments to the parent were to evade local taxes and assessed the corresponding taxes on the Indian subsidiary
Examples of enforcement actions for regulatory breaches
Argentina:
Argentine law contemplates fines of up to 25 times the premium for insureds and agents for violations
In 2010, an Argentine insured and broker were fined 8 and 15 times the premium, respectively, for purchasing non-admitted insurance from a U.S. insurer
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18. Overcoming Challenges Through a Partnership Approach
Territorial spread
Local servicing and service standards
Monopolistic and/or state-owned local insurers
Compulsory cessions and/or local retentions
Exchange control regulations
Claims handling in unsophisticated markets
Manuscript policy form
Issue
Issue
Your fronter has no formal representation in certain territories
Lack of service support at the local level and or inconsistent service at a program level
Problematic and heavily regulated environment
Erosion of exportable premium
Impact on remittance of exportable premiums
Ensuring technical claims are handled appropriately and reinsurers are aligned with the claims settlement process
Not permitted in all markets
Action
Utilize an experienced fronter with established local partners with the required knowledge, experience, and capabilities
Utilize a Service Level Agreement with KPIs to ensure consistent service standards across the program
Utilize local market knowledge, experience, and relationships with local authorities
Utilize an agreed panel of approved loss adjusters and issue a claims protocol / bulletin to ensure consistent claims handling across the program
Ensure that local wordings are acceptable.
Challenges and solutions for multinational obstacles
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19. The AIG Network
AIG provides multinational insurance and services through the largest network of wholly owned operations of any property and casualty insurance operation, spanning more than 90 countries and jurisdictions.
Restricted Countries
Owned Operations
AIG-affiliated entities are able to provide admitted coverage (including on a Freedom of Services basis) in approximately 100 jurisdictions (including non-sovereign jurisdictions)
Network Partners
AIG is able to provide cover in an additional 118 jurisdictions through its relationship with Network Partners 19

20. Practical Examples

21. The AES Corporation Based in Arlington, VA
Operates in 21 countries on 5 continents
21,000 employees
Annual revenues $15.9bn
Over 37,000 MW of generating capacity
Building new assets in 5 countries
Many development plans under consideration
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22. Why AES Chose a Captive Solution
AES business style was historically decentralized
Identified scale efficiency opportunity for insurance purchasing
Aim for product consistency – policy language, limits, insurers – all providing balance sheet protection
Using the captive as a true Risk Management tool in areas of risk engineering, optimum deductible structures and only offering cover appropriate to needs of individual assets – Risk Informed Decision Making
AES chose onshore domicile (VT) for captive location
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23. Challenges – Wording
Using a company-developed manuscript or local form policies
Choice of language in local policy documents – how do you actually know what it says?
Local rules mandating use of specific policy forms or “normal market practice”
Requirements for regulatory approval of manuscript wordings
How to ensure concurrency between local form, master and reinsurance wordings
Examples – valuation language (RCV, ACV, 2 x ACV options ) or policy style (all risks or named perils)
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24. Challenges – Taxation and Other Costs
Your need to understand the total costs of issuing the policy
Reinsurance taxes (may be hidden to local insured)
Local insured payable taxes VAT/IPT/IVA (will be visible to local insured)
Fronting fees
Commissions and cession fees
Government charges
Foreign exchange and timing exposures
A premium base of $100 can easily become a local cost of $150 or more
Do you receive the same % level of risk as premium?
A reference to the range of advice that GRS and Multinational can provide on local country regulatory requirements
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25. Challenges – Coinsurance
A local coinsurance % may be mandatory or encouraged by local regulators
Selecting local partners
Solvency and quality of partners
Consistency of following intended policy terms and conditions
Ability to pay and willingness to pay claims
Experience of dealing with type of cover required
Who sets the policy terms and conditions, e.g. premiums, deductibles and develops the policy language
Having local coinsurers can be beneficial for high risk locations to allow spread of risk
A reference to the range of advice that GRS and Multinational can provide on local country regulatory requirements
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26. Challenges – Currency Currency affects all financial limits on policy
Overall limit, sub-limits, premiums, claims
Choice of currency on policy (local or international, e.g. USD)
Managing concurrency with reinsurance
Local regulations may mandate a local currency policy
Regulatory oversight of all currency exchanges
Who owns the currency risk upside and downside?
Currency impact on policy valuation and claims adjustment
A reference to the range of advice that GRS and Multinational can provide on local country regulatory requirements
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27. Handling International Claims
Protecting reputation is always a priority for large losses
Are there local rules mandating how claims are handled with regulated processes and timelines?
Is the business subject to public tender processes for asset repair or replacement?
Are there suitable local adjusters and experts?
Managing the impact of currency risk in repairs
Is the priority asset repair or revenue restoration – use of expedited repair or temporary repair solutions
Can you get parts, equipment and labor to the repair site?
A reference to the range of advice that GRS and Multinational can provide on local country regulatory requirements
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28. Managing Stakeholders – Subsidiaries
Understanding local business circumstances
Be aware of conflicting budget priorities
Local vendors will always be knocking on your door with offers of assistance
Be able to explain the values of participation in global program
Scale efficiency, broad wordings and services, balance sheet protection, additional profitability for parent, access to engineering resources, lender compliance, etc.
Use of benchmarking tools
A reference to the range of advice that GRS and Multinational can provide on local country regulatory requirements
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29. Managing Stakeholders – Local Partners
Who is the local partner – government, investor, bank, joint developer – do they have other business interests that they want to support, e.g. local insurance company?
What is the ownership % for each party, how is the shareholder agreement structured?
“Related party” transactions
Independent directors
A reference to the range of advice that GRS and Multinational can provide on local country regulatory requirements
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30. Managing Stakeholders – Lenders
Without the lenders finance, the project dies so they have a critical role
What does a lender expect for insurance limits, coverage, deductibles and insurer security?
Is required cover “commercially available at reasonable terms”
Handling non-compliance and waiver requests
Priority of access to insurance for shared limits and priority of payments to designated accounts above $ limits
Local lenders or international lenders including institutions such as World Bank and International Development Funds
A reference to the range of advice that GRS and Multinational can provide on local country regulatory requirements
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31. Questions and Final Comments

32. Disclosure
AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. For additional information, please visit our website at All products and services are written or provided by subsidiaries or affiliates of American International Group, Inc. Products or services may not be available in all countries, and coverage is subject to actual policy language. Non-insurance products and services may be provided by independent third parties. Certain property-casualty coverages 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. Insurance coverage is account specific and is governed by actual policy language. This presentation does not constitute an offer to sell any of the insurance coverage or other products or services described herein. We do not provide legal, credit, tax, accounting or other professional advice, and you and your advisors should perform your own independent review with respect to such matters as they relate to your particular circumstances and reach your own independent conclusions regarding the benefits and risks of any proposed transaction or business relationship.
© American International Group, Inc. All rights reserved.
American International Group, Inc. (AIG) is a leading international insurance organization serving customers in more than 130 countries. AIG companies serve commercial, institutional, and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange.
Additional information about AIG can be found at | YouTube: | Twitter: @AIGinsurance | LinkedIn:
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