Insurance Market Anything But Global, As Both Cultural, Legal Obstacles Remain

"They're all trying to do it better" in terms of "operational efficiency"–in part by becoming more technology-oriented, he said. "If they do it better, they make more money out of it."

However, no matter how big the carrier or brokerage might be, working within a particular foreign market can still be a stiff challenge, even when that environment is supposed to be friendly.

Jan Tomlinson, executive vice president and international field operations manager for Chubb, pointed to China–perhaps the biggest emerging market for insurers, with its booming economic growth and growing importance in the global economy–as an example where positive change has occurred, but where significant operational and cultural hurdles remain.

"China is seen as a rapidly developing opportunity due to the opening of the market and the rapid economic growth in the country," she said. "The challenge has been that while the regulatory environment is changing and is welcoming to foreign insurers, the regulator is slow to implement the changes necessary for foreign insurers to develop their operations."

As an example, she noted that in early 2004, all foreign insurer branches were required to become licensed as wholly-owned subsidiaries–a process that did not always go smoothly or quickly.

Further complicating the effort, she added, is the "sheer geography" of China. "Insurers need to be licensed in each province, or apply for a national license, which can be cost-prohibitive," she said.

Local competition has also proven to be an obstacle for insurers looking to gain marketshare in China, according to Ms. Tomlinson. Although China remains "a long-term opportunity," she said companies already in place are a significant factor.

"The country is large and populated by over a billion people, but the property and casualty market is only $26 billion in premium–of which 70 percent is motor," she said. "The general sense is that there is much more business to be underwritten–however, it is mostly controlled by domestic companies."

Another problem is the risk of flooding an emerging market with coverage, according to Mr. Tobin, who noted that conditions in overseas markets–such as in Italy or Argentina–have become much more competitive thanks in part to interest from foreign carriers.

"The U.S. market got very hard after [Hurricanes] Katrina, Rita and Wilma," Mr. Tobin said, in reference to the 2005 record storm season, with carriers that had absorbed significant losses looking for other places to put their capital.

"You had people moving capital from America to other countries," he said. "It became very competitive, and good for customers," he added, as local companies worked to maintain their portfolios while international carriers tried to gain traction, particularly for middle-market risks.

From a casualty perspective, the focus has shifted largely to corporate governance issues and ensuring the legality of insurance contracts, according to Mr. Gallello.

Regulatory developments such as U.S. disclosure and corporate responsibility requirements under the Sarbanes-Oxley Act, as well as the European Union's Caverna premium tax decision, forced carriers to "ensure that they were operating legally" within the respective countries where they wrote business, he said.

(The Caverna decision said that in order for coverage on any risk to be considered legal, insurers would have pay the appropriate premium taxes to the local authorities. So, if a company sought to insure something in Amsterdam through Lloyd's, the Lloyd's market would now have to ensure that proper premium taxes are paid to Dutch authorities.)

Legality can be a major factor in setting up a multinational insurance program, according to Mr. Gallello, who pointed to directors and officers coverage as an example, since until recently D&O had not been a significant exposure outside of the United States.

"The trend overseas is to see more D&O litigation," according to Mr. Gallello, but local laws don't always allow for coverage. "What we are seeing is that companies are now finally understanding that a D&O policy issued in the U.S. is not necessarily legal in France," he said.

In fact, Mr. Gallello noted that it is actually illegal in some countries, including France, for a company to indemnify its officers. As a result, insurers have designed their controlled master programs so that the D&O policy would probably pay for the loss in France to the company in the United States, he noted.

In other areas, such as India and China, Mr. Gallello said there are ongoing issues with product liability exposures.

"A lot of these products are made by contract manufacturers," and are then purchased by vendors and brought into the United States to be sold under the vendor's label, he explained, adding that "for years, these vendors have been assuming the [product liability] risk of these contract manufacturers."

Given the recent spate of health problems related to tainted imported products, product liability coverage has taken on new importance.

While there might be a clause in the contract calling for the manufacturer to obtain insurance, Mr. Gallello noted that practically speaking, "it's not the easiest thing in the world to actually get them to buy product liability coverage."

However, he added, distributors are being more forceful about the issue, and some Chinese markets are seeking to make it easier for the two partners to buy coverage that aligns more closely terms and conditions. The bad publicity over the past year about dangerous toys and pet food products imported from China "raised everyone's attention," he said.

Meanwhile, "we're seeing a lot of carriers looking more closely at supply-chain issues" in emerging markets, according to Mr. Gallello, with multinational companies concerned about problems in one part of the world disrupting their operations globally, with insurance coverage implications.

Underwriting is just one side of the coin for multinational exposures–the other being distribution, which can be a big problem in developing markets, according to Ms. Tomlinson.

"Broker and agent distribution…is not developed in emerging markets," she said. "As a result, companies are forced to look at alternative distributors or developing their own sales force."

Putting together a local sales force presents a challenge of its own, given the complex nature of insurance and the availability of talent, Ms. Tomlinson added.

"There is not a talent pool of individuals experienced in the insurance business," she said. "Consequently, there is strong competition for talent."

Going forward, Mr. Gallello points to areas in South and Central America, among others, as potential growth targets for the U.S. insurance industry, as those markets become less monopolized and more open to foreign competition.

Ms. Tomlinson noted that economic development is also driving the United Arab Emirates as an emerging market for insurers, as well as countries in the former Soviet Bloc.

"There is an interest level in Russia by some companies, and recently there has been more interest in developing the Saudi Arabian market," she said.