This post discusses the use of insurance by international businesses and multinational companies. In this post, you will understand global insurance and the use of global insurance by international companies.

WHAT IS A MULTINATIONAL CORPORATION?

Multinational companies are international businesses that operate in several states or countries. A multinational corporation (MNC) is a company that operates in its home country and other countries around the world. It maintains a central office in one country, coordinating the management of all its other offices, such as administrative branches or factories. 

Multinational companies are global businesses undertaking and managing business activities with significant investment across national boundaries. It is not enough to refer to a company that exports its products to more than one country as an international company. They need to maintain business operations in other countries and make a foreign direct investments there. Multinational companies are also known as Transnational corporations. In this video, we will be using corporation and company interchangeably.

CHARACTERISTICS OF A MULTINATIONAL CORPORATION

Here are the features of multinational corporations:

1. Very high assets and turnover

2. Network of branches

3. Internal control

4. Continued growth

5. Sophisticated technology

6. Right skills

7. Effective marketing and advertising

8. Good quality products

HOW DO MULTINATIONAL COMPANIES TRANSACT BUSINESS?

Multinational companies can transact business in the following ways: 

1) Exportation of goods and services, 

2) Obtaining a licence from the host nation to produce goods in the local community, 

3) Production and distribution of goods through a branch in the host nation,

4) Mergers and acquisitions, and 

5) Provision of managerial services to firms in the host nation.

REASONS FOR BEING A MULTINATIONAL CORPORATION

There are several reasons why companies want to become multinational corporations. Here are some of the most common motivations: 

1. Access to lower production costs

2. Proximity to target international markets

3. Access to a larger talent pool

4. Avoidance of tariffs

ADVANTAGES OF BEING A MULTINATIONAL COMPANY

There are many benefits of being a multinational corporation, including:

1. Efficiency

2. Development

3. Employment

4. Innovation

FOREIGN DIRECT INVESTMENT

Foreign direct investments are prevalent within multinational corporations. Investments occur when an investor or company from one country invests in the country of operation. Foreign investments often happen when a foreign business is established or bought outright. Foreign investments can be distinguished from purchasing an international portfolio containing only the company’s equities rather than purchasing more direct control.

RISK TRANSFER THROUGH INSURANCE

Why would multinational companies transfer their risk through insurance? 

The benefit of insurance is a significant factor influencing the use of insurance by multinational companies to manage their risks. Benefits of insurance as a risk transfer technique include: 

1) Maybe suitable based on multinational companies’ risk attitude and appetite,

2) They have a legal, insurable interest in their subsidiaries and Joint Ventures,

3) Spread of risk and reinsurance support,

4) Introduces a degree of certainty over loss financing, 

5) Facilitate access to insurers’ expertise, and 

6) There may be compulsory elements.

DISADVANTAGES OF INSURANCE PRODUCTS TO MULTINATIONAL COMPANIES

1) Price and availability may vary.

2) It might need to be more encouraging in terms of exploring other risk management techniques.

3) Insurers include profit margin and operating expenses in their charges.

4) Cost of risk issues.

5) It may increase the cost of financing events with high frequency and low severity. 

6) Wider insurance market issues. 

7) However, regulatory and tax bases are the most significant potential hurdles.

8) The use of conventional insurance as a risk financing method by large multinational companies has reduced over the past 20 years.

9) It is still the predominant method and represents a global market measured in billions of pounds or dollars. 

10) Few multinational companies may completely avoid using, at least, some forms of insurance to manage their risks.

BASIC INSURANCE OPTIONS FOR MULTINATIONAL COMPANIES

Basic insurance options for multinational companies include:

1) Buy locally in every country in which they have a risk exposure (relatively uncommon),

2) Buy a global policy in their home country to cover all the risks in all the countries, with no local policies (much less standard than it once were), 

3) Utilise a combination of both (increasingly common), and 

4) Do not buy insurance at all (uncommon).

GLOBAL INSURANCE PROGRAMMES

Multinational companies prefer to purchase global insurance packages to cover their homogeneous risk exposures across all locations or countries where they operate. This is beneficial because it saves time and reduces administrative expenses. Global insurance programmes are called Coordinated Global Insurance Programmes and Controlled Master Programmes. 

Multinational companies often prefer international operations to have international insurance packages because they can optimise: 

1) Consistency,

2) Legality,

3) Control – local managers may lack appropriate knowledge,

4) Economies of scale and leverage, and

5) The complete overview of losses.

CONTENT OF GLOBAL INSURANCE PACKAGES

What are the likely required covers for multinational companies? Generally, global insurance packages for multinational companies are in three categories: property, liability, and other insurance packages.

REASONS FOR BUYING INSURANCE IN THE HOST COUNTRY

As discussed earlier, multinational companies prefer to purchase global insurance packages to cover their homogeneous risk exposures. This is beneficial because it saves time and reduces administrative expenses. Multinational companies may, however, decide to buy purchase insurance in the host country. 

Reasons, why multinational companies would buy insurance in the host country, include:

1) It may be a legal requirement,

2) It may be politically expedient,

3) If the insurance represents a closer connection between the cost of risk, the cost of risk financing and local risk management requirements, 

4) Tax and claims payment problems may be less likely to arise, and 

5) Multinational companies can rely on their brokers and insurers to make the purchases.

Meanwhile, the local insurance market may be problematic for various reasons, including

1) Transitional economies may only recently have moved from the state ownership of insurance,

2) In all types of developing economies, capacity may be limited partially due to reinsurance difficulties,

3) Solvency may be problematic and lacking in transparency, 

4) Fragmented purchasing reduces economies of scale benefits, and 

5) It does not promote holistic risk management, an enterprise risk management (ERM).

GLOBAL INSURANCE PROGRAMMES INFLUENCING FACTORS

Factors that should be considered for a global insurance packages contract include:

1) What are the insurable risks, and how do these differ from the domestic insurable risks?

2) What is the multinational corporation’s risk appetite, and is this consistent across all territories, subsidiaries, and Joint Ventures?

3) Is there a role for Export Credit Guarantee Insurance?

4) Areas of operation, e.g., insurance purchasing for an EU-based company operating only in EU or African countries, is relatively straightforward. Buying outwit the European Union, and Africa is complex.

Concerning global insurance programmes administration, the following should be well-coordinated: 

1. Authorisation,

2. Compulsory insurance, 

3. Taxation, 

4. Local conditions,

 5. Content of global packages, and 

6. Coordinating all global insurance programme risk factors is complex.

NON-ADMITTED INSURANCE

Non-admitted insurance refers to a policy written in one country that covers exposures in other countries by an insurer whom the latter’s government does not authorise. Non-admitted insurance can be permitted (not illegal) but not legally recognised or non-permitted (i.e., illegal). Typically, Non-admitted insurance is arranged in a multinational firm’s home country to cover risks in host countries. Generally, no local policy will be issued. However, permitted non-admitted insurance has become increasingly uncommon in the global insurance markets.

TYPES OF GLOBAL INSURANCE PROGRAMMES

There are three types of global insurance programmes:

1) Fully (or ‘Locally’) admitted programme,

2) Non-admitted programme, and

3) Combined programme.

The type of a global insurance programme will impact the authorisation system and enforcement regulation. A fully admitted programme may utilise ‘fronting’. To demonstrate how fronting works, let us see an example of possible non-admitted issues.

HOW DOES FRONTING WORK?

Many insurers refer to ‘Fronting’ as ‘partnering’. The multinational company’s (MNC) insurer is non-admitted in various countries, but the MNC wants to be compliant. The insurer issues a master policy, but local insurers agree to issue policies in non-admitted countries as part of that. In developed insurance markets, these local policies may be acceptable. In less developed markets, they may need to meet the multinational company’s or the insurer’s standards. A ‘combination policy often tackles this’.

COMBINATION INSURANCE PROGRAMME

A combination insurance programme combines local admitted programmes supporting non-admitted Difference in Conditions (DIC) and Difference in Limits (DIL) policies. DIC and DIL are often written on a contingency basis, i.e., the premium payable depends on the settlement of the policy. This may involve a significant degree of fronting.

COMPULSORY INSURANCES

Compulsory insurance is one central area of concern for multinational companies’ use of insurance. Compulsory insurance requirements vary globally, but virtually all countries have one or more mandatory insurance requirements that international firms should purchase locally.

Common compulsory insurances across the world include:

• Liability for personal injury, especially motor and employee,

• Fire insurance on certain classes of business, and

• Third-party liability for property damage and financial loss.

Key Risk Assessment Questions for compulsory insurance include:

1) What are the compulsory insurances, and what are their compliance rules?

2) How fluid is the country’s approach to them, e.g., China’s recent moves to make environmental insurance compulsory?

3) Are there exemptions?

4) Must they be placed locally with an authorised company?

RELUCTANCE OF HOST COUNTRIES TO ACCEPT FOREIGN INSURANCE POLICIES

Some of the reasons why governments of multinational firms in the host countries may be reluctant to accept policies issued by foreign insurers. Two primary reasons may be responsible for the reluctance: 

1. Financial factors, and 

2. Operational factors.

THE INFLUENCE OF REINSURERS 

Reinsurance is integral to the insurance market. Reinsurance is an extension of insurance as reinsurers act as insurers to insurance companies. Reinsurers’ actions impact all buyers of insurance. However, their actions are more keenly and more immediately felt by large-scale buyers such as multinational companies. The main impacts will likely be cost, availability, and terms and conditions.

CAPTIVE INSURERS

Multinational companies can set up captive insurance. A captive insurance company is an insurance subsidiary of a non-insurance entity or parent-owned by the insured. Captive insurance companies are formed to supplement commercial insurance, allowing companies to retain the money otherwise spent on insurance premiums. Multinational companies own most captives. A captive insurer is a subsidiary formed to insure the loss exposures of its parent company (or companies) and affiliates whose primary purpose is to reduce the parent’s cost of risk.

MANAGEMENT OF MULTINATIONAL COMPANIES INSURANCE CLAIMS

Claims administration and management is another delicate aspect of the insurance of multinational firms’ risk exposures. Some problematic elements of international claims include:

1) International interpretation of contracts – e.g., implicit and explicit conditions. 

2) Does domicile (that is, the host country) principles apply globally? 

3) Litigation – e.g., time, cost, expertise, impartiality. 

4) Enforcement of judgements – e.g., the existence of agreements, likely costs.

See the full video on the use of insurance by international businesses and multinational companies insurance Claims: https://youtu.be/QjkYH_S5iR4