Global Programs: Navigating U.S. Casualty
First published in Commercial Risk Europe.
If we take the U.S., differences in state regulations, as well as a consumer-friendly legal system, mean that managing casualty risks can appear daunting. A global program, backed by an insurer with international reach and expertise, is one way that clients can ensure they are getting the most appropriate coverage. Mukadder Erdoenmez, Head International Casualty EMEA & LatAm at XL Catlin, explains how global insurance programs can help clients to manage and optimise the transfer of complex casualty risks.
What are the major differences between casualty risks when operating in the U.S. compared with Europe?
The U.S. legal system is a common law jurisdiction – like the UK – rather than a civil law jursidiction, which is prevalent throughout mainland Europe. In addition, the U.S. jurisdiction is generally more consumer-friendly. The attorney system is focused on compensation for success and the existence of class actions creates an environment where plaintiffs look for deep pockets. This also creates an environment where companies need to be extremely cautious about how they present themselves in marketing campaigns, for example. Hypothetically, a company that produces a drug and discloses that one of the side effects is weight loss, could then run into trouble if a wholesaler starts selling the drug as a weight-loss aid – although this is not what the pharmaceutical company intended at all. If consumers then find that the drug does not, in fact, help them to lose weight, then the pharmaceutical company could – theoretically - be held liable in any court case brought by those dissatisfied consumers. The U.S. legal environment creates a system where both the compensation and reputational risks are much higher for clients than in other countries and punitive damages can be significant. So you should not only have an insurance policy in place that responds to the risks of this different environment, but also an insurer who is capable of providing the right risk management expertise. The focus when working with clients should always be to analyse their individual potential risks profile, discuss and implement risk mitigation measures and align the structure of the insurance policy with the identified specific exposure of the client.
How do global programmes help clients to cover these risks?
One way of optimising insurance purchase, ensuring coverage harmonisation across multiple territories and guaranteeing compliance is a global program. Particularly for the U.S., which is a highly regulated insurance market, with individual regulations per state, clients with casualty exposures need to have policies that respond to the legal, compliance and reputational risk environment. The global program is one option to ensure they can obtain – and optimise – the coverage elements and policy limits they need. The global program structure allows clients to integrate their local U.S. exposure into an international coverage concept. This allows the local U.S. casualty policy to interact with a Master policy with regard to “Difference-in-Limit” (DIL) and “Difference-in-Conditions” (DIC). While the local U.S. policy ensures that the client can respond to the local insurance regulations and has coverage for specific local requirements in place, the Master policy provides harmonisation for coverage elements which are not part of the locally filed U.S. policy. It is very common that U.S. local policies do not encompass coverage extensions which are provided in policies with a freedom of form – like for instance product recall or manufacturers E&O. Of course, insurers always need to make sure that the coverage we offer is legally and tax compliant in the states where it is required.
What are the differences between admitted and non-admitted coverage?
The United States is a highly regulated territory when it comes to insurance. Every state has its individual insurance regulator and the clients need to comply with these regulations if they want to operate in the specific territory. One key characteristic of the U.S. insurance market is the differentiation between admitted and non-admitted markets. Admitted insurance carriers are licensed by state regulators and subject to governmental backing, while non-admitted carriers – also often known as surplus lines insurers – are not regulated by the state and don’t contribute to state guarantee funds. Because of that state support, admitted markets are required to file their wordings and their rates with state regulators. This can mean it’s difficult to build a dedicated solution for a client if they are buying coverage on an admitted basis. If a client has a complex risk, or requires specific coverage, then it is usually better to provide non-admitted insurance. So, for multinational clients, with specific coverage needs, it often makes most sense to provide coverage on a non-admitted basis because this allows us to apply an individual rating model and to design a tailored insurance coverage.
What about emerging casualty risks, such as cyber?
Cyber exposures are one of the most critical emerging risks clients are faced with. U.S. data protection regulations, and the EU’s General Data Protection Regulation, which will come into effect from 25 May 2018, affect international clients, and also clients that are only physically present domestically but which provide products and services to international clients. For example, if you conduct business with international customers or run an online shop in the UK, and a client in California buys your product providing you with his or her credit card details, then you become subject to the data regulation of California. Companies operating in a globalized and connected world need to be aware of this. If you as a company decide to expand into the U.S. and set up a local operation which holds employee information then you are even more exposed to U.S. data regulation requirements. The continuous development and the nature of technology and products mean that, particularly cyber, risks are evolving. For example, a coffee machine that you can start from your smartphone while you are travelling home, brings with it a whole new raft of potential liability exposures. The world is becoming more complex. And this is where the insurance industry can help clients to adapt.