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Risk Focus: Multinationals

Prevent Your International Business from Losing Millions with a CMP

As companies seek international business opportunities, demand for controlled master programs has never been greater.
By: | June 1, 2018 • 5 min read

Globalization and the growth of ecommerce resulted in more U.S.-based companies expanding and doing business overseas than ever before. However, the ever-changing raft of local tax and insurance laws and regulations multinational firms have to contend with means demand for fully-functioning controlled master programs, or CMPs, has never been greater.

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A CMP combines a global master policy, usually issued in the country where the firm is headquartered, with local admitted policies in the various countries where it operates to provide umbrella coverage.

“Gone, seemingly, are the days that large enterprises are confined to only their domestic market,” said John Osterhagen, regional practice leader, Allianz Multinational, Allianz Global Corporate & Specialty North America.

“There is also an increasing trend for smaller corporate entities needing to have multinational program solutions as they also become more global.”

While being the lead carrier on such a program may initially seem to be an attractive proposition to many insurers because of the premium volume it can earn, the risks involved are extensive.

Carriers therefore need to have a sophisticated knowledge of local laws and regulations in the countries their clients operate in as well as a granular understanding of those businesses and the operations they’ll insure.

Experts say few carriers have the true capability to pull this off successfully and profitably. Those who do though, can reap the rewards.

“There are fewer carriers today with the capability of pulling together a program of this nature than there were 15 years ago,” said Nick Batten, vice president of global services, FM Global.

“That’s why it’s more imperative than ever to choose an insurer with an appropriate network and controls in place with consistent underwriting, form and claims handling.”

Increased Demand of Controlled Master Programs

Increased regulatory scrutiny requiring companies to conform with local tax and insurance laws, and the threat of penalties from governments and local authorities, drove many multinationals to turn to controlled master programs as a solution.

Nick Batten, vice president of global services, FM Global

Added to that has been the escalation of bilateral and multilateral agreements among regulatory bodies with shared borders, which further tightened the net on foreign firms.

Osterhagen said the need for controlled master programs is also driven by demand from companies for specialty coverage, including cyber, aviation, product recall, equipment installation and terrorism/political risk. Additionally, there has been increased client awareness of compliance and taxation issues, he said.

“Controlled master programs are the industry standard in being able to meet these client needs,” he said.

“They allow for both uniform cover and central control, while also providing the flexibility in local underlying policies to respond to local rules, insurance law, taxation, market standards and language.”

Carriers See Lead Advantages

Being the lead on large corporate lines programs enables the carrier to better influence policy terms and conditions as well as to expand its risk share when opportunities present themselves. They have a greater chance of being profitable with a wider spread of risk.

Steven Haasz, global chief operating officer, AXA Corporate Solutions Assurance

“From a property standpoint, the greater scale and geographic diversity of risk, the better for the carrier,” said Alfred Bergbauer, The Hartford’s head of multinational.

“If, for example, you have 20 locations, then chances are not all 20 locations are going to burn down at the same time.”

Taking the lead also enables carriers to develop a long-lasting relationship with the client, which can reap greater rewards, said Steven Haasz, global chief operating officer, AXA Corporate Solutions Assurance. It also allows them to have a greater role in setting the agenda, he said.

“By being the leader, you have the ability to help influence the [controlled master programs’] terms and coverage to meet the client’s needs,” he said.

“That way you can set the tone and agenda for how you want to shape the program for them.”

From a client’s perspective, having controlled master programs also enables them to achieve greater consistency across their global operations.

In order to do so, though, the client needs to work with their insurer to find a compliant solution across multiple countries that provides tailored coverage, customized claims handling and pricing consistency.

Controlled Master Programs and Their Challenges

But leading a controlled master program comes with its own host of challenges, not least the complexity and costs involved in managing a chain of third parties, from brokers and reinsurers to claims adjusters and risk quality engineers. It’s critical for carriers to factor in these expenses in pricing and to manage that network accordingly.

While many of these costs can be addressed through charging global fronting fees, ceding commission from retrocessionaires or pricing premiums adequately, the insurer needs to have a full understanding of all the above products. The carrier also has to balance its needs with those of the client.

Because every market is different, carriers need to intimately understand and keep abreast of the latest changes and developments in that market in order to remain compliant. They must also have a detailed understanding of the industries they are writing insurance for.

“If you have a client who deals in a highly volatile and risk-sensitive product, it may not be … the best candidate to insure. But when you look at the manufacturing methods used, quality assurance and recall methodology in place, it may actually be a risk worth writing.” — Alfred Bergbauer, head of multinational, The Hartford

“This is a real determiner of whether an insurer can achieve and maintain profitability,” said Allianz’s Osterhagen.

Different occupancy structures, fire suppression standards, supply chain variations and special perils are all areas that need to be looked at closely, Osterhagen said.

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Lou Capparelli, executive vice president, Chubb Global Casualty, said any changes must be identified and addressed by the underwriter, the brokers and the insureds. These can include changes to tariffs, tax regimes, premium exportability and the claims environment, he said.

Carriers also need extensive knowledge of the individual business they are underwriting, said Bergbauer.

“If, for example, you have a client who deals in a highly volatile and risk-sensitive product, it may not be on first impression the best candidate to insure,” he said. “But when you look at the manufacturing methods used, quality assurance and recall methodology in place, it may actually be a risk worth writing.”

AXA’s Haasz added: “At the end of the day, you need to understand your client’s business fully and what they are trying to achieve from their insurance program and how you can address those needs in the multiple countries they operate in.

“You can only accomplish that by working closely with the client, brokers and partners in your network across these territories to deliver the right solution.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Workers' Comp

Do You Have Employees or Gig Workers?

The number of gig economy workers is growing in the U.S. But their classification as contractors leaves many without workers’ comp, unemployment protection or other benefits.
By: and | July 30, 2018 • 5 min read

A growing number of Americans earn their living in the gig economy without employer-provided benefits and protections such as workers’ compensation.

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With the proliferation of on-demand services powered by digital platforms, questions surrounding who does and does not actually work in the gig economy continue to vex stakeholders. Courts and legislators are being asked to decide what constitutes an employee and what constitutes an independent contractor, or gig worker.

The issues are how the worker is paid and who controls the work process, said Bobby Bollinger, a North Carolina attorney specializing in workers’ compensation law with a client roster in the trucking industry.

The common law test, he said, the same one the IRS uses, considers “whose tools and whose materials are used. Whether the employer is telling the worker how to do the job on a minute-to-minute basis. Whether the worker is paid by the hour or by the job. Whether he’s free to work for someone else.”

Legal challenges have occurred, starting with lawsuits against transportation network companies (TNCs) like Uber and Lyft. Several court cases in recent years have come down on the side of allowing such companies to continue classifying drivers as independent contractors.

Those decisions are significant for TNCs, because the gig model relies on the lower labor cost of independent contractors. Classification as an employee adds at least 30 percent to labor costs.

The issues lie with how a worker is paid and who controls the work process. — Bobby Bollinger, a North Carolina attorney

However, a March 2018 California Supreme Court ruling in a case involving delivery drivers for Dynamex went the other way. The Dynamex decision places heavy emphasis on whether the worker is performing a core function of the business.

Under the Dynamex court’s standard, an electrician called to fix a wiring problem at an Uber office would be considered a general contractor. But a driver providing rides to customers would be part of the company’s central mission and therefore an employee.

Despite the California ruling, a Philadelphia court a month later declined to follow suit, ruling that Uber’s limousine drivers are independent contractors, not employees. So a definitive answer remains elusive.

A Legislative Movement

Misclassification of workers as independent contractors introduces risks to both employers and workers, said Matt Zender, vice president, workers’ compensation product manager, AmTrust.

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered.”

Misclassifying workers opens a “Pandora’s box” for employers, said Richard R. Meneghello, partner, Fisher Phillips.

Issues include tax liabilities, claims for minimum wage and overtime violations, workers’ comp benefits, civil labor law rights and wrongful termination suits.

The motive for companies seeking the contractor definition is clear: They don’t have to pay for benefits, said Meneghello. “But from a legal perspective, it’s not so easy to turn the workforce into contractors.”

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered in the eyes of the state.” — Matt Zender, vice president, workers’ compensation product manager, AmTrust

It’s about to get easier, however. In 2016, Handy — which is being sued in five states for misclassification of workers — drafted a N.Y. bill to establish a program where gig-economy companies would pay 2.5 percent of workers’ income into individual health savings accounts, yet would classify them as independent contractors.

Unions and worker advocacy groups argue the program would rob workers of rights and protections. So Handy moved on to eight other states where it would be more likely to win.

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So far, the Handy bills have passed one house of the legislature in Georgia and Colorado; passed both houses in Iowa and Tennessee; and been signed into law in Kentucky, Utah and Indiana. A similar bill was also introduced in Alabama.

The bills’ language says all workers who find jobs through a website or mobile app are independent contractors, as long as the company running the digital platform does not control schedules, prohibit them from working elsewhere and meets other criteria. Two bills exclude transportation network companies such as Uber.

These laws could have far-reaching consequences. Traditional service companies will struggle to compete with start-ups paying minimal labor costs.

Opponents warn that the Handy bills are so broad that a service company need only launch an app for customers to contract services, and they’d be free to re-classify their employees as independent contractors — leaving workers without social security, health insurance or the protections of unemployment insurance or workers’ comp.

That could destabilize social safety nets as well as shrink available workers’ comp premiums.

A New Classification

Independent contractors need to buy their own insurance, including workers’ compensation. But many don’t, said Hart Brown, executive vice president, COO, Firestorm. They may not realize that in the case of an accident, their personal car and health insurance won’t engage, Brown said.

Matt Zender, vice president, workers’ compensation product manager, AmTrust

Workers’ compensation for gig workers can be hard to find. Some state-sponsored funds provide self-employed contractors’ coverage.  Policies can be expensive though in some high-risk occupations, such as roofing, said Bollinger.

The gig system, where a worker does several different jobs for several different companies, breaks down without portable benefits, said Brown. Portable benefits would follow workers from one workplace engagement to another.

What a portable benefits program would look like is unclear, he said, but some combination of employers, independent contractors and intermediaries (such as a digital platform business or staffing agency) would contribute to the program based on a percentage of each transaction.

There is movement toward portable benefits legislation. The Aspen Institute proposed portable benefits where companies contribute to workers’ benefits based on how much an employee works for them. Uber and SEI together proposed a portable benefits bill to the Washington State Legislature.

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Senator Mark Warner (D. VA) introduced the Portable Benefits for Independent Workers Pilot Program Act for the study of portable benefits, and Congresswoman Suzan DelBene (D. WA) introduced a House companion bill.

Meneghello is skeptical of portable benefits as a long-term solution. “They’re a good first step,” he said, “but they paper over the problem. We need a new category of workers.”

A portable benefits model would open opportunities for the growing Insurtech market. Brad Smith, CEO, Intuit, estimates the gig economy to be about 34 percent of the workforce in 2018, growing to 43 percent by 2020.

The insurance industry reinvented itself from a risk transfer mechanism to a risk management mechanism, Brown said, and now it’s reinventing itself again as risk educator to a new hybrid market. &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected] Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]