December 18, 2017

Challenges in international D&O insurance

In today’s global business environment, the stakes are high for directors and officers, who face growing liability exposure in multiple jurisdictions.

In an increasingly competitive marketplace, insurers seek wider access to prospective international clients and the ability to tailor products to their respective needs.

However, the possibility for reward is also great, particularly for insurers who are best able to identify the emerging trends and changing direction of the D&O coverage marketplace. These trends are difficult to predict and model, admittedly, but there is an opportunity to establish themselves as market leaders. To do so requires an understanding of the diverging and countervailing interests at play in the global marketplace between regulators, insureds and insurers.

The regulators

Modern insurance regulators will consider a number of factors when approaching international D&O coverage issues.

The first is the role of jurisdiction and sovereignty. We live at a time when trends towards free markets and open borders are in growing tension with trade protectionist and nationalistic movements.

Emerging markets are often wary of foreign multinationals bypassing local oversight by dealing exclusively with foreign insurers when contracting their D&O protection for local operations. Especially in post-colonial contexts, the notion of foreigners attempting to avoid local sovereignty strikes a resonant and reminiscent chord. The desire to support and develop more robust local insurance markets, with growing middle classes and diversifying insurance demands, will also weigh heavily on regulators’ minds.

Ensuring adequate public protection and local economic interests is another priority for regulators. A primary concern is how effectively local entities can enforce indemnity when payouts by the foreign insurer are merited. Regulators may prefer some type of local licensing or presence by insurers to ensure that local plaintiffs are compensated as a consequence of impugned D&O activity. Moreover, local courts can render policy exclusions unenforceable, such as intentional acts exclusions, if thought to be in the local interest. In contrast, jurisdictions with less developed insurance markets may choose to lower their barriers to foreign insurance to increase availability, improve competition, and lower premiums in the interest of promoting local economic growth.

Evolving tax policies are also a factor. As in Canada, regulators will likely continue to impose significant taxation conditions to the extent that they tolerate non-admitted foreign insurance. Premium taxes, self-procurement taxes, excise taxes, and income tax obligations are all means by which local regulators can shape and influence the form in which D&O insurance is operationalized across international borders.

In Brazil, for example, the extent to which foreign companies can seek foreign insurance to cover their D&O exposure is not abundantly clear under local law.[1] Parent companies with subsidiaries therefore run the practical risk of multijurisdictional taxation should they have to transfer insurance payouts, received in their home countries, overseas to Brazil once local coverage has been eroded by large losses.

India is another market where insurance is subject to strict restrictions on foreign non-admitted insurance. Generally, foreign non-admitted insurers are prohibited from underwriting risks in India without government permission.[2] Although this is clear for property insurance, it is less certain to what extent the restrictions apply to D&O insurance in India, nor for that matter the extent to which foreign companies can provide non-admitted D&O coverage to their Indian subsidiaries. For example, when local coverage is eroded, global master policies may be able to respond for the excess loss, subject to approval and possible double taxation issues imposed by authorities focusing on the extent to which the local subsidiary is seen to have purchased foreign insurance to cover local risks.[3] Multinational insureds and insurers, therefore, need to proceed with meticulous caution to properly navigate the evolving demands of the increasingly powerful Indian marketplace.

The insured

What makes D&O insurance particularly sensitive to the vagaries of local jurisdictional requirements is that it is truly personal insurance, but for commercial activities.  It covers individuals who potentially face financial hardship or ruin, and even incarceration, if the claim is not dealt with correctly or effectively.  D&O are more attuned to this reality in some jurisdictions than others. They will want to verify that the insurance program put in place on their behalf is appropriate and matches the risks they face.

In seeking global coverage programs, insured entities — generally large multinational corporations — can contract individual policies in each jurisdiction to ensure regulatory compliance, but at a larger combined cost. The downside is that they will have to manage hundreds of policies with different insurers, all of which have varying wordings and inconsistent levels of coverage.

Another way is to contract a single global policy that provides consistent and reliable coverage for all its international operations. That would streamline the administration and management of the insured’s risk at the lowest cost. In a practical sense, however, such programs are often untenable given wide regulatory and tax variations across international borders that render uniform claims analysis, settlement, and payouts very difficult if not impossible.

A balanced approach is often preferable, combining local policies in certain jurisdictions with a larger global policy. Also, the global policy can provide primary coverage, where necessary, to streamline administrative issues and reduce costs as much as possible.

The insurer

In an increasingly competitive marketplace, insurers seek wider access to prospective international clients and the ability to tailor products to their respective needs. They, too, are faced with the intricate balancing act of meeting multiple local compliance obligations while trying to adequately model and underwrite cross-border risks.

Risk modeling requires reliance on predictable local results and reliably enforceable policy wording. However, even identical wordings may receive completely different interpretations from one jurisdiction to the next, leading to uncertainty in claims adjustment, payment, and risk analysis.

Under these circumstances, it is difficult to keep premium and operating costs affordable while managing unwieldy multijurisdictional risk. In this respect, insurers’ interests are somewhat aligned with multinational insureds given that a tailored approach balancing local policies where necessary in conjunction with global master policies represents a compromised middle ground to navigate the increasingly transnational future of D&O risk.

Learning to live with uncertainty

Ultimately, the global D&O insurance market involves a complicated and evolving confluence of regulatory, political, and business interests. That translates into a large amount of uncertainty for those designing global coverage programs, but also represents an important growth area with robust potential. Those that are best able to meet the international demands of a changing global economy will be poised to seize a crucial competitive advantage in an increasingly crowded insurance marketplace.

[1] Marcelo Mansur Haddad & Paulo Grassia Accioli Freire, “Brazil” in Perry S Granof & Henry Nicholls, eds, The Global Directors and Officers Deskbook, (Chicago: American Bar Association, 2014) at 203.

[2] The Insurance Act, 1938 at Part II; The General Insurance Business (Nationalisation) Act, 1972 at s. 25; Foreign Exchange Management (Insurance) Regulations, 2015 at s. 3.

[3] See, for example, Suresh Krishnan, “The emerging regulatory challenge to non-admitted insurance” (Chubb, October 2013) at 4.