by Rich Ventura, CPCU

The genesis of multinational insurance began after World War II. It was at this time that many businesses became "multi-national," what we routinely refer as the multinational corporation (or the MNC) today. It became necessary for the insurance business to follow their corporate policyholders into the multinational arena and be able to afford coverage on a global basis. It was at this time that the large multinational insurance companies came into being: AFIA, INA, AIG. Shortly thereafter, many European companies started doing the same. The German, French, and Italian companies started to provide multinational coverage to their clients. The Japanese made an art form of developing international insurance as many Japanese companies went global in the 1970s and 1980s. There families of interdependent companies or keiretsu made it natural to follow and provide coverage for their companies as they branched out into the multinational arena.

Today, the two largest US companies in the international insurance arena are INA and AIG. (INA bought AFIA in the early 1980s.) Companies like Chubb and Kemper have tried to break into the international insurance market but, to date, have not been too successful. Kingsley said that it costs a lot at the present time to get a "flag," i.e., develop and maintain a viable, profitable insurance operation in another country. There are costs involved in staffing offices, complying with regulatory authorities, capital and licensing requirements, as well as political impediements. For instance, many countries pass laws making it easier for indigenous companies to operate than for foreign subsidiary organizations. In general, most of the insurance business operations in other countries are indigenous and premium generated to US international insurers only represents about 5% of total premium at present. Kingsley predicted that it could well become 0% in the next 10 to 15 years because of the many barriers involved and because so many of the captives and fronting companies, which represented a significant share of international business, are no longer needed.

International insurance followed the American broker system. It was stronger in Asia than in most European countries. In 1996, Japan patterned its marketing techniques after the broker system; in 1997, Korea followed suit. As a general rule in Asia, however, there are not brokers so much as there are agents who operate in the local regulatory environment. For the most part, around the world, there are independent agents, and agents in the distribution system. They will most likely be around a long time and it may be a while before the brokerage system is approved by regulatory agencies in other countries. For example, there are "case" agents or house agents who control and dominate much of corporate business in Asia, Latin America, and Europe, particularly Germany. These agents also operate as very sophisticated risk managers on behalf of their corporate clients.

Developing distribution is the key to the international markets. The current agency systems in many countries are a major hindrance to breaking into the markets. The "broker" and the brokerage system must be accepted by the regulatory agencies and leading corporations in other countries around the world if the international insurance market is to succeed. In countries like China, Japan, and Korea, the cultures are one where face to face interactions are desired. They like to see somebody. The climate in these countries has been favorable to agents, particularly those involving family and relational ties, e.g., brothers, cousins, friends, etc. It is difficult for some brokers to overcome this.

In the area of regulatory issues, agreements like GATT (which has included insurance services) and agencies such as the WTO and USTR have a lot of say and some clout in opening up the international market place. These agencies and trade agreements, however, are not the only things needed to open up the international markets but what must also be addressed are licensing and capital requirements, and legal and political environments if an insurer is to be successful. Many companies do not even have insurance regulations (e.g., Viet Nam) and some have just been recently established and still need to be worked out (e.g., China, Soviet Commonwealth countries).

The regulatory and political issues are closely related. One example is ownership rights. In some countries, like China, INA incorporated in Shanghai in 1897. Now it is required that a multinational insurer be owned by a local for a 50+% share. Another example is Malaysia where locals must own at least 30% of the business. Even companies that have operated in Malaysia for some time before this requirement went into effect must divest ownership for locals to share. This is nothing more than political. Countries prefer indigenous operations based on political favors and pressures, and relational ties. Other areas where politics favors local companies are: 1) licensing – it is easier for locals to meet licensing requirements in many countries; 2) capital requirements – some countries are substantially increasing capital requirements for outside companies, e.g., Ecuador increase foreign capital requirements from $1 Million to $9 Million; 3) solvency – requirements are similar. In fact, in some countries, governments protect insolvent local insurers or take them over for sale (e.g., Korea, Indonesia, Chile, Brazil, Mexico, and Columbia). In cases such as these, an argument can be made that some of these countries need foreign capital to help pay policyholders’ claims owed by insolvent insurers. Foreign regulators have to made aware that the strengthening of local markets will be one result of allowing US entry into their insurance markets.

Another political risk facing those interested in the international markets are the fast paced changes of rules and regulations that take place with any change of government. Many countries have a history of political and economic instability. Governments come and go and with each, there are changes in laws, rules, and regulations. Places like India, Indonesia, and various Latin American and African countries have experienced political instabilities and frequent changes of governments which have resulted in instabilities in the regulatory and insurance environments.

Economic instabilities are also another major challenge facing the international markets. In the US, there are relatively stable macro and micro-economic conditions. This is not the case in the international markets. The Asian and Mexican economies have undergone serious stresses. Indonesia is in crisis currently and many Latin American countries have historically experienced economic crises. These problems present tremendous risk to international insurers. Costs and values can drop drastically in a short amount of time. In one instance, medical costs went up almost 60% overnight and sent loss ratios through the roof. In some instances, local currency costs can increase causing premiums to be woefully inadequate. A carrier must closely track and be sensitive to these political and economic changes if it is to succeed in the international arena.

It almost goes without saying that any insurer wanting to succeed in the international markets will need to hire the best and the brightest of local nationals. They will need to staff offices with people who are aware of political and economic conditions in their respective countries. Also, as culture and language can be a main barrier in breaking into these markets, locals will be invaluable in these areas as well. Locals will be necessary to establish a presence in any foreign market and local offices are an essential. A business if Ecuador can not be run out of New York or London. And the people of the country prefer to deal with people of their own nationality than an American or an Englishman.

Lastly, Kingsley touched on two other major challenges to breaking into the international markets: the first was the rule of law (or, in many cases, the lack thereof), and the second was the lack of statistics. In the US and in many countries around the world, rule of law is important. Not so in others. There is either no rule of law or it is made up as you along. This is particularly true in the insurance industry. For instance, when the Korean airliner was shot down, Lloyds argued that it was an act of war and not covered while the Japanese authorities said it was an "accident" and was covered. Companies were forced to pay. With regard to statistics, there is little to no loss data in other countries. Lack of information on loss frequencies and severities make it difficult to quantify GL, personal lines, and Cat exposures. It is difficult to price and underwrite without vital metrics and statistics. In most countries, reliable statistics simply do not exist. Still, certain countries are attractive market places and can generate profits if a company does its homework.