The New World of Global D&O Insurance
Note: This is the first of a two-part Risk Insider look at D&O.
It’s less than 20 years since the concept of worldwide Directors & Officers Liability (D&O) insurance was introduced. Since that time, the world of international D&O changed dramatically.
In particular, there is much greater awareness that multinational firms may need to secure local D&O policies within their respective countries of operation. The global market for D&O coverage also evolved.
Multinational corporations face some significant emerging exposures that may not be adequately addressed by the traditional global [non-admitted] programs that have historically dominated the market. Several factors have contributed to this shift, including:
- Increased D&O claim frequency and severity outside the United States.
- Greater regulatory enforcement, especially with respect to tax collection.
- A growing number of officers residing in or traveling through foreign operations.
- Taxes on “non-admitted” claims payments.
- Increased local capacity and local market availability in general.
- Indemnification constraints in many countries that can be very significant.
- The potential for undesirable publicity or harm to the corporate “brand.”
These recent market influences created a demand for foreign local [admitted] D&O policies in many countries.
Approximately a decade ago, carriers began to develop and promote their ability to offer and service foreign local D&O policies.
Multinational corporations face some significant emerging exposures that may not be adequately addressed by the traditional global [non-admitted] programs that have historically dominated the market.
Before these programs emerged, the Difference in Conditions (DIC) program approach allowed local operating entities to insure their own operations on an admitted basis in each country of operation.
This led to some companies’ foreign operations determining their own level of exposure and then negotiating and binding coverage with a local carrier — sometimes a different carrier than the one writing the parent company’s “worldwide” policy. That resulted in a few problems but did offer an improvement.
Multinationals headquartered in the U.S. could then use their U.S. D&O program as a DIC policy to address various gaps, just as the local policies would customize themselves to local laws and regulations.
The new and improved DIC program follows the methodology of coordinating all D&O placements throughout the world. Sounds great, but it’s still quite complicated.
For example, a U.S. multinational with significant operations in 30 countries might have sufficient D&O exposure to decide to obtain local policies in each country.
Here is how that strategy might be executed, assuming the multinational’s primary D&O carrier has underwriting capabilities and local policies in all 30 countries:
- 20 countries have an agreement with the U.S. carrier for centralized billing and policy issuance.
- Two of those 20 countries ask for something like a “Know your Customer” [anti-money laundering] form to be completed and may also want a locally signed D&O application.
- Eight countries require local payment and perhaps local policy issuance. One should use local brokers for this.
- The remaining two countries require local applications completed for local underwriting.
A few countries will require payment upfront before binding or perhaps a local signature on the policy at the time of issuance.
Though challenging, there are many significant benefits to structuring this type of program:
- Coverage is placed and premium taxes paid in compliance with local laws.
- Coverage is customized to the unique exposures, yet can be broadened by the coverage written on the “worldwide” D&O policy [usually in the United States].
- Economic leverage based on the size of the headquarters program may lead to lower deductibles in the foreign subsidiary locations.
- Local claims-paying abilities will generate both better advice and greater protection for Side-A D&O liabilities in countries where indemnification is difficult to obtain.
- Corporate gains quality control over the entire program as they direct all purchases.
Now that the need for a customized global D&O program is obvious, the risk can be assessed and prioritized in each country and purchased accordingly.
See Part II here.