Insurance on a global scale.

• Author: Rand, John

If your business is global, should your insurance be global, too? Not necessarily. Examine your company's needs to find out.

There is no doubt the 1990s will be the "global decade." In nearly every annual report, the letter from the chairman stresses how the company is positioning itself to compete in the global environment. Manufacturing and service industries alike believe that they must expand their markets around the world if they are to survive.

Expansion, be it domestic or international, brings new risks along with new rewards. Insurance and risk management is one element of managing those new risks. How best to handle this part of the expansion process can be difficult to gauge. Should you leave risk management in the hands of local management, or should you coordinate it from the corporate level? Should you segregate the non-U.S. business from the U.S. business or combine all the elements? Are globals applicable only to Fortune 100 companies, or can mid-size multinational companies also benefit? And is the insurance industry capable of providing the insurance and risk management products you need?

GLOBAL TREND

Multinational companies of all sizes are moving toward global programs. Historically, most U.S. insurers wrote coverage only in the U.S. and Canada, while most European insurers wrote only European risks. Those few insurers that did cross the Atlantic generally still segregated their portfolios, in part to satisfy their reinsurers. This meant that identical buildings in Rome, New York, and Rome, Italy, were treated as totally different risks. In a global program, both U.S. and Canadian and international coverage are coordinated by a single major insurer.

Global programs are not new to the insurance industry. Coverages such as excess liability and directors' and officers' liability have been written on a worldwide basis for decades. But these forms of insurance are not complicated. They require only one policy to be issued to the parent corporation, and policies for operating subsidiaries around the world are not necessary. It has only been within the last several years that companies have undertaken the more complex forms of global coverage, forms of coverage that require local servicing.

WHAT HAS CHANGED?

Global insurance programs have become more prevalent as a result of increasing demand for insurance products and as Europe - and much of the rest of the world - has opened its insurance marketplaces to competition. Insurance companies and brokers, just like manufacturing companies, have been forced to become global to survive.

Throughout much of Latin and South America, strict government control of insurance has diminished. Starting with Chile in 1980, through recent changes in Argentina, Colombia, and Mexico, regulations controlling rating and reinsurance have been overturned. Competition among insurers has increased, and foreign insurers have begun to enter the local markets.

Changes are also occurring in the East, albeit at a much slower pace. China, which doesn't allow foreign insurers, will allow some reinsurance. Japan has gradually eased its strict tariff-rating structure, allowing deductible and loss prevention credits and broader use of the freely rated inland transit policies, which apply to movable assets.

The Eastern European borders have also opened up, and Western insurance companies are quickly entering that market.

The most dramatic changes have occurred within the European Economic Community. The opening of the European insurance marketplace to competition actually began before Europe 1992. The European Economic Community's Freedom of Service Directive, issued in 1988 and effective as of July 1, 1990, for the...