Global Insurance Pond Has Midsize Fish

Brokers need to serve smaller firms with growing international presence

In the mid-20th century, the largest U.S. corporations began to reach outside the country's borders to sell their products and services. Later, as the global economy expanded, the use of international parts and labor became a permanent part of the economic landscape.

However, for decades a perception existed in the business world that only the largest U.S. companies were “truly” global.

The insurance industry focused its attention on those companies. The largest brokers created international departments to handle the risks of global players. International insurers were no different, focusing on the largest multinational companies with operations in over 10 countries.

By the 1980s, multinational carriers began to see another customer opportunity–the U.S. exporter. International carriers began to develop insurance products for businesses that were going overseas for the first time. These insurance programs focused on addressing the needs of companies with little to no physical presence overseas.

For the first time, international insurance expanded beyond the top-three brokers and into the mainstream of the U.S. insurance market.

However, in all of this activity, one segment of the global insurance market was neglected. For all of the development in the international insurance market, there was never a strong delivery of products or services targeting midsized but multinational companies.

The middle market has always been a hard-to-define and hard-to-service area for both insurance carriers and brokers. By definition, middle-market companies need more service than small companies, but they may not generate sufficient premiums and revenues to justify a full range of customized technical services.

Moreover, every carrier and every broker has defined the middle market differently, leaving an uneven delivery of products and services.

The problem is more pronounced overseas. There are a large number of companies with overseas operations that far surpass those of an exporter but are not as extensive as a Fortune 500 multinational. That segment of the market's need for a full international insurance program has gone virtually unanswered by insurance brokers, agents and carriers.

There are a variety of reasons for this:

o Most local and some regional brokers do not have “internationalists” on staff (individuals who specialize in international insurance issues).

o National brokers have international specialists but do not make them available to middle-market customers because those accounts do not generate sufficient revenues. Even today, some brokers are edging out this customer base by setting minimum-revenue requirements.

o Multinational insurance carriers that have struggled with the costs of international programs have placed minimum premium requirements that are prohibitive to midsized companies.

o Middle-market companies have not been forced into controlled programs, where insurance is purchased in the United States and extended internationally, because pricing has remained lower for a firm's international exposures than for its exposures in this country.

The Middle Market “Box”:

The biggest problem for middle-market companies is that the insurance industry has tried to put all of these businesses into one “box” with one product. Clients were offered either a controlled worldwide program or an exporter's package.

If they bought a program, they bought a worldwide program with a network of brokers servicing their insurance needs globally with a common goal. If they bought a package, they had a simple product that provided U.S.-style insurance coverage on a non-admitted basis.

A middle-market company with operations in more than two or three countries does not fit either box. To get the right program, it is important to look at all of the options available today.

Middle-market companies need to expand their programs to fit their business as it grows. A global program approach means centralized control over the insurance placements. This approach gives the business a better, more comprehensive program with less overlaps and gaps in insurance placements worldwide.

Without being locked into an exporter's package or a Controlled Master Program (a domestic program extended overseas), a business can run its insurance program in the same manner that it runs itself, decentralized or centralized, with a single purchase point or multiple profit centers.

Producers will need to be aware of a few factors that midsized global clients will be evaluating as they determine the best insurance approach worldwide. Those factors include:

o The types of operations overseas (sales offices, manufacturing, joint-ventures, franchises, etc.).

o The customer's worldwide expansion plans. What are the critical areas for the next five years, acquisition plans and management controls?

o The management style–centralized or decentralized.

o Does the broker's firm have the expertise to handle the international account and the network structure?

o The current insurance placements.

These are critical elements clients will be looking at as they approach their international insurance placements respective of program structure, carrier choice and brokerage selection.

Brokerage Selection:

Broker selection is important to any aspect of a business' insurance program. Selecting an international broker is no different. An international program should focus on two areas:

o International expertise for account service and coordination in the United States.

o Network reach and expertise worldwide.

For a midsized company with operations in more than a few countries or companies with major manufacturing operations outside of the United States, the broker needs to provide a dedicated international account team. This is critical to a program's smooth administration.

A true internationalist works on just international exposures–these are not global account executives who work on all aspects of their clients' risks. International insurance is as specialized as directors and officers liability. To secure the best program for the client, this exposure should be worked on by a dedicated international technician.

An international broker network is equally important because it is the communication vehicle for a company's insurance program worldwide. Even though insurance programs have grown more sophisticated, the choices available for brokerage services overseas have remained extremely limited.

For years, multinational corporations have been told that alignment with a major, multinational brokerage firm was the only viable approach. That is not true.

Over the years, an alternative to the multinational broker began to surface as some independent national and regional U.S. brokers extended their service capabilities overseas through non-owned networks and strategic partnerships. This created a client-focused network alternative to the institutionally focused network.

For middle-market companies, non-owned networks, or strategic partnerships, can offer an attractive alternative to being considered a small account in the mega-broker network system.

Once a broker demonstrates the firm's ability to service the client's insurance needs, the next concern is network cost.

Every multinational client should receive a full accounting of its worldwide insurance costs every year. Once these costs are tallied, the broker should disclose the total amount of revenue shared between the network and the directing U.S. office.

If there are minimum revenue requirements by country, those should also be discussed. These can be critical considerations for a midsized company.

Program Structure and Carrier Selection:

After the selection is complete, client and broker need to work together to determine the optimum program structure. There are several options available, and the right one is as individual as the company.

There are only a handful of insurers that offer worldwide programs, and their appetite for a risk is dependent upon the program structure. An international broker should have sufficient market knowledge to guide the client in this area.

For some businesses, a controlled master program is the right way to go. Under a CMP, the risk or insurance manager places the program and controls the placement of policies by the master program carrier worldwide. For most clients, this approach is not being used or is not feasible given existing management controls.

In most situations, the optimum program will be a mix of controlled placements, differences-in-conditions over existing placements that cannot be moved, and non-admitted placements for small or emerging operations. This type of program structure allows a midsized company to grow and have its insurance program grow with it.

Ideally, this structure should be combined with a risk management plan that outlines the worldwide insurance requirements of all of the company's operations to ensure that the right level of insurance is secured worldwide.

Since this kind of program structure is customized, the broker plays a key role in determining the right carrier and maintaining adequate control, coordination and supervision worldwide. Communication and information are critical to this process.

With the right program structure, the broker can work with the middle-market client to tailor an insurance program that fits the client's current operations as well as its international growth plans.

International programs don't just happen overnight–in fact, it frequently takes two to three years to fully implement them. However, given how important international operations can be to a midsized company, it is time well spent!

Elizabeth Francy Demaret is the managing director of Itasca, Ill.-based Arthur J. Gallagher's Worldwide Risk Services Group Niche.

A large number of firms have overseas operations that far surpass those of an exporter but are not as extensive as a Fortune 500 multinational.

“The client and broker need to work together to determine the optimum program structure. The right program is as individual as the company.”

Elizabeth Francy Demaret