For multinational organizations that operate in multiple countries, global insurance programs offer a great combination of control, consistency and cost-effectiveness. But with the growth of regulation and the increased focus on corporate governance, some organizations are discovering that they don't have quite the insurance risk coverage they thought.

Aon Global's risk consulting practice recently brought together legal and tax experts with clients and insurers to highlight the issues that give rise to this exposure. The consequences could be damaging, both for the organization, and for directors and senior executives who find they have less protection than they thought. They're not limited to fines and punitive tax settlements—in some cases senior officers risk imprisonment.

THREE COMPLEXITIES OF DIRECTORS & OFFICERS LIABILITY INSURANCE

"The biggest problem," says Praveen Sharma, "is that some global risk programs are not admitted in certain countries. Local legislation may require that certain types of cover are placed with an insurer who is licensed in that country. In extreme cases, it is not just that the global program doesn't provide the cover clients think they have—operating without a local policy can be illegal, exposing both the firm and individual officers to an unexpected level of risk."

Second, the cash flows associated with global programs can generate unexpected tax exposures. "With some premiums paid centrally and then charged back to local operations, some charged locally, and claims payments following similar routes, it's easy to fall foul of differences between tax regimes," says Mike Allen, senior tax manager of KPMG in the U.K. "A large claim paid centrally and transferred internally to the country where the loss occurred may generate a taxable gain in one country that's not offset or only partially offset by tax deductions in the other, depending on the profitability of the respective operations and the different national tax codes."

The third complication involves Insurance Premium Taxation. "The basis on which insurance premiums are allocated within an international group must stand up to close scrutiny," says Adrian Smith, head of IPT for KPMG in the U.K. "Just allocating it based on turnover or number of employees may not be accurate enough. Best practice is to be able to demonstrate that the allocation of premium reflects the level of technical and financial risk in each country."

A CUSTOMIZED APPROACH for GLOBAL COVERAGE WITH LOCAL INSURANCE

Put these factors together, and it becomes clear there is no one-size-fits-all solution. Insurers are responding to the challenge by ensuring that they have the most complete map of national legislation possible, and by offering programs that ensure total global compliance by combining global cover and additional local policies as required. This helps when the insurance is with a single carrier, but since most global programs are complex affairs, even this may not provide the solution. "Financial Interest" clauses also help in some cases, providing the ability to protect the parent company's overall interest in a subsidiary without getting into all the complexities outlined above.

But total compliance comes at a cost. For required insurances, the investment is essential, as operating in a country without required cover puts a firm's license to operate at risk. Things become more subjective, however, when it comes to covers that are not required by legislation, such as D&O. In those cases, careful analysis will help identify the true risk faced by the organization and individuals, so a firm can assess whether providing total cover for all officers in every territory is cost-effective.

MAKING GLOBAL RISK INSURANCE PROGRAMS WORK

"There really is no substitute for detailed analysis," says Bruce Wineman of Aon's Global Client Network, who specializes in making global programs work. "We apply a model that looks at the company's operating footprint and risk management program, analyzing country by country the exposures that may lurk within a global program." The analysis results in a simple red/amber/green classification that allows firms to see where they need to direct their efforts to ensure they effectively manage their compliance risk.