Stretched supply chains, high levels of inflation, the conflict in Ukraine, and the COVID-19 pandemic continue to stress economies around the world and significantly affect organizations’ risk profiles. As existing risks evolve and new ones emerge, organizations have been under increased pressure to develop risk and insurance management strategies that are resilient as well as to build risk management programs that respond to fast-changing challenges.
For global businesses, the uneven impact of evolving and emerging risks is compounding the challenges of managing their multinational portfolios and introducing new risks for directors and officers. As they seek to remain competitive, business leaders need to understand this changing risk landscape, identify the interconnections, and take action to protect the bottom line, focusing on three main risks.
1. Inflationary Pressures
High inflation in countries around the world is increasing the value of many insured assets. At the same time, supply shortages are prolonging rebuild times and operational stoppages after losses. Underwriters are increasingly scrutinizing insured values to make sure that these reflect today’s replacement costs, requiring organizations to reevaluate their insured properties and assets to determine whether they have adequate coverage that will facilitate recovery in the event of a loss.
Uneven rates of inflation in different countries create an added complication for global companies that must ensure local subsidiaries update the valuation of their property and assets in line with inflation rates.
In addition, insurers are concerned about the impact of inflation on their bottom lines as higher costs contribute to larger claim settlements, which can lead to reserve deficiencies, faster erosion of deductibles, and inadequate coverage. Unease over underinsured assets on their books is leading some underwriters to include policy provisions designed to limit recovery to reported values, coinsurance or average clauses, or coverage disclaimers. It is critical that your management team review and update property values to ensure that they are current and align with inflationary effects.
Liability costs are also escalating due to inflation, with rising defense costs and settlement amounts and an increase in nuclear verdicts. The dynamic of social inflation has been impacting US claim trends for many years and is a growing dynamic across the global marketplace, most notably in the United Kingdom. Management teams also should scrutinize customary liability insurance limits to ensure that they are sufficient in light of these increased costs.
Underinsurance risks are not restricted to your own operations, but to all organizations that you do business with. It is critical to understand insurance requirements during an inflationary period and scrutinize the coverage required of third parties to determine whether they have sufficient limits to cover risk emanating from the relationship.
2. Tax and Regulation Risk
Global organizations with interests in different countries face the added task of abiding by local regulations, including tax requirements from both country-specific and global policies.
However, amid mounting pressure to reduce their spending in the face of inflation, many insurance buyers are foregoing country-specific coverage and instead purchasing global policies to cover their multinational risks.
Although it may lead to financial savings (often upwards of 25 percent) and lower administrative costs, it can open local entities to government investigations and disruptive audits, as well as hefty fines and penalties, if their coverage is not in line with local regulations. The liability created by indirect taxes also is often not identified by the insured entity’s tax group.
Further, claims on global programs tend to be paid to the parent company, which typically then needs to transfer this money to the local entity that experienced a loss. These transfers, when legally allowed, may trigger additional income tax, eroding any program savings. Large monetary transfers may also trigger examinations, requiring risk management and treasury teams to spend time preparing their response to protect the firm instead of focusing on initiatives to improve the company’s resilience.
Your business leaders should work with local entities to review country-specific requirements and determine whether these are adequately addressed through a global program or they require local coverage.
3. Shifting Data Protection Regulations
From the European Union’s General Data Protection Regulation to the California Consumer Privacy Act, different countries and regions are looking at new regulations to protect their citizens’ private data. Enforcement efforts highlight the potentially exorbitant costs of noncompliance with data protection laws, delivering blows to the brand as well as the bottom line.
Not only can companies be held liable for possible mishandling of customer information, but there is also a growing demand for companies to have the financial reserves to pay any fines and other costs related to a breach. Insurance is one of the most sought methods to provide protection for such losses and satisfy applicable laws. Relying on a simple global insurance policy will likely become increasingly difficult in the face of varying country regulations.
Risk management teams should partner with global risk advisors to understand the data privacy risk climate in individual countries and any laws imposing liability for privacy breaches or requiring financial security in each country. Localized risk assessments can help your country risk managers determine whether current policies offer adequate protection.
Improving Your Multinational Resilience
As business leaders take actions to improve resilience in the face of emerging risks, organizations with subsidiaries in several countries will need to make sure that each local entity has adequate coverage to satisfy local regulations and provide the necessary protection in case of a loss.
This can be a moving target for many global programs, requiring significant commitment from the risk management team to keep up to date with shifting country requirements. Risk management teams should continuously monitor emerging risks and evaluate the suitability of current insurance program design to meet cost and compliance comfort levels.
Christian Hunter is the senior vice president and multinational Insurance Regulatory and Tax Consulting Practice leader, North America at Marsh.
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