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Involving Your Captive in Multinational Programs

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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 C020513

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. C032813

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 C032713

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 C091813

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 C112912

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 C030513

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. C041513

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. C032813

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 C032813

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. C032813

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. C032813

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 C032813

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 C032813

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 C091813

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 C030513

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 C030513

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) C030513

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 C030513

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 C030513

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 C030513

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 C030513

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 C030513

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 C030513

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 C030513

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: C013014

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