Like never before, senior finance professionals hunger for information that can help to determine the economic impact of events around the globe. And, once they have captured that information, they must correctly assess the impact such developing events may have on their business.
The recent Mattel Inc. toy recall and other publicized product liability and product recall events emanating from China are perhaps excellent examples of such events.
While CFOs often turn to their risk managers to get a quick read on such developments, where do risk managers turn? Certainly, firsthand knowledge of the dynamics of China's complex regulatory environment is not necessarily a prerequisite for most risk management positions. This is why the Mattel recall and events like it are helping to energize partnerships between risk managers and their sources of global expertise, of which insurance brokers are among the most active.
The fact is that risk managers should today expect their insurance brokers to be consistently bringing them timely, relevant, risk-related information from all over the world to help them assess the impact of events on their businesses. Meanwhile, to meet this rise in demand for global information, insurance brokers must develop an international network that includes an effective global communication process specially designed to help their clients recognize, understand, and evaluate international exposures.
The ongoing product recall cases involving substandard products from China provide continued evidence that quality control remains a significant issue there. U.S. firms need to carefully investigate and analyze the companies to which they outsource work and, if at all possible, get a read on the quality control processes related to work that is being subcontracted to these firms. It's no secret that many U.S. firms have realized economic savings due to China's relatively low cost of production, yet recent events confirm that even one noncompliant manufacturer can lead to major problems and significant adverse financial exposures for unsuspecting U.S. firms.
Along with managing quality control, it is important to monitor the insurance coverage of firms being used as outsourcing partners. In general, firms in China do not purchase much insurance. More specifically (and troubling), many do not carry product liability coverage. U.S. companies should require Chinese manufacturing firms to purchase product liability coverage and require additional insured status on the local policies. Certificates of insurance are available from the carriers in China as evidence of coverage.
Be careful, however, about relying solely on certificates of insurance as evidence of coverage. They are readily available -- perhaps too readily, as some Chinese firms have been known to practice unethical behavior by providing false information about their insurance coverage. U.S. companies may remain significantly exposed if they do not have a process in place to confirm the validity of coverage being evidenced by manufacturers in China.
Everything is copied in China. You can purchase copies of pirated movies, merchandise, and technology -- there are already reports of iPhones being "cloned" and available in China. Unfortunately, insurance company evidence of insurance forms are being copied as well. Some firms have used these fake forms to "meet" insurance coverage requirements in business contracts. This situation is serious enough that AIU China, a wholly owned subsidiary of American International Group Inc., now includes an ID number on their form that enables companies to confirm the validity of coverage using the AIU China Web site.
Some firms in China have also been known to purchase insurance coverage to fulfill a contract requirement and then simply cancel the coverage once the contract is under way. This "customary" practice appears to be somewhat widespread throughout China. Based on these practices, it may be worthwhile for risk managers to utilize local resources, including their broker's local representative in China, as a part of the process to confirm that the coverage being evidenced by their Chinese subcontractors is actually valid and in force.
The saying "you get what you pay for" is especially true in China, even when purchasing "knockoff" goods. Part of the bargaining experience in China, as in other countries, is to negotiate the price. What is not necessarily considered in the negotiation is an assumed standard of quality. For example, if you are willing to spend more, you get a higher-quality "knockoff." If you drive the price down to a level that is perceived as too low, merchants may agree but will also give you a lower-quality product without your knowledge.
The same concept applies to purchasing insurance in China. Of the limited number of firms that do purchase coverage in China, many look to drive the premium down to the lowest possible amount -- often below a reasonable price. While underwriters are often willing to reduce the premiums to these low levels, in the event of a claim the insured will likely "get what they pay for." Some underwriters will take a narrow look at the scope of coverage where the premium is deemed "too low" and will look to exclude coverage in ways that would not ordinarily happen as a business practice of U.S. or European underwriters.
Alternatively, U.S. firms that allow local management to negotiate and place coverage outside of a global program can reduce the risk by including some measure of control, input, or review of the local insurance coverage by corporate risk management. In this way, the risk manager, likely with help from their insurance broker, will be in a better position to determine if the subsidiary's local program includes proper coverage terms and is not priced too far below market rates.
The claims process in China is quite different from that in the U.S., and in some ways it is difficult to believe or understand. Many claims personnel in China are not open to negotiation when managing claims. They typically review a claim from one particular point of view, make up their mind, and then rigidly maintain their position. It is often difficult to get relief once a claim is denied, as business and cultural practices do not enable you simply to bring in a manager to review and discuss the decision as you would in other parts of the world. The decision is often left to the frontline claims person, and it is not common practice in China to involve a higher authority in the process.
There are multiple examples of carriers in China excluding coverage when U.S. firms would have expected their policy to respond. In one example, the word "disaster" was included as part of the coverage form. A loss occurred, but the firm was able to continue operations. The claims person determined that the loss was not a "disaster" because they were able to continue operating. Based upon this fact, the local Chinese carrier denied the claim.
In another example, involving product liability, some metal shavings accidentally ended up in a food product as part of a production process. While there was product liability coverage put in place by the firm, the carrier denied the claim, stating that it had never intended to cover a mistake "like this" in the client's manufacturing process.
One way to mitigate the impact of the local claims process is to arrange your coverage in China through a controlled master program. This enables your broker to leverage the global carrier and help resolve any local claims issues. If the local coverage in China is written on a stand-alone basis outside of a global program, the best solution is for the subsidiary to arrange coverage using a reputable, licensed, local broker. Your global broker can participate most effectively in the process if the subsidiary utilizes the global representative in China to arrange the coverage rather than uses its own local broker or obtains the coverage directly from the carrier.
In 2004, the Chinese government created an industrial injury plan. This approach fits in with the government's goal of promoting a harmonious society for its citizens by helping to protect them if they are injured at work. Employees can also sue employers for benefits in addition to those provided under the national work injury plan. Because of this, many U.S. firms now purchase local employer's liability coverage as a supplement to the national work injury program.
There is a potential coverage gap in this national work injury model based upon the local practice in much of China. Work injury benefits and procedures actually vary by city in China. Some municipalities have determined that employers are liable to pay benefits in addition to those provided in the national work injury scheme. These additional benefits mandated by the municipalities are not included in the basic employer's liability or personal accident policies in China, and, until recently, there was no way to properly insure these exposures.
The local market has since developed Employer's Occupational Injury Liability (EOIL) insurance to fill this gap. The policy is designed to provide the specific benefits due employees under the municipal requirements that are not covered under the national work injury program. This coverage is available on a stand-alone basis and in some cases may be added as an extension to a local employer's liability policy.
It is now recommended that if a firm wishes to fully insure its work injury obligations in China, it should purchase EOIL coverage as well as participate in the national work injury program. A company can also purchase employer's liability coverage to protect against suits brought against it by employees. Some domestic firms continue to purchase personal accident coverage extended to workplace injuries to provide additional benefits. Working with a licensed broker in China is very important for coordinating this coverage most effectively.
Tasked with answering upper management's questions concerning the potential impact these issues in China have on their company's business, risk managers are hurrying to review their company's current risk mitigation plan for China and tap the global expertise of different partners.
Perhaps no partner is better prepared to help with the process than your company's insurance broker. Choose one wisely.
The Director Exposure: Think Global, Act LocalOfficer Liability Offerings AdvanceAlong with the constant review of individual country issues, such as the examples outlined for China, there are other issues involving international insurance that multinational firms should be aware of and further consider as part of their risk management program. Local, admitted general liability and employer's liability policies have been arranged in countries outside of the United States as part of master insurance programs for many years. However, there has been very little thought given to arranging local, admitted directors' and officers' liability coverage as part of global D&O programs in countries outside of the United States. In recent years, local officers and managers in a number of countries have attempted to raise this as an issue. As a consequence of SOX and heightened internal controls for U.S. companies, it may be time for such firms to begin considering admitted directors' and officers' policies for some of their subsidiaries outside of the United States. In some countries, directors' and officers' assets may be frozen if they are sued and there is not a local, admitted D&O policy in place. Brazil is one such example. Recent regulatory changes there have made directors and officers personally liable for their actions as executives of their company. The regulations confirm that a nonadmitted policy, such as a global directors' and officers' policy written out of the United States, cannot be used as collateral for a suit brought against a director in Brazil. In other countries, such as France and Italy, directors, officers, and managers have greater exposures based on their local systems and laws than these same-level employees in many other countries. These local executives and managers often raise concerns about being covered under only a U.S.-based policy. In France, the responsibilities of directors, officers, and managers have become more open to question and are becoming more visible. These people are being held to a higher standard of personal responsibility and may even be held personally responsible for the actions of their employees. The exposure for directors in Italy has also increased in recent years due to legislation relating to the responsibility of directors in that country. Many of these individuals outside the United States are not comfortable that they, and their personal assets, are being adequately protected by a nonadmitted D&O policy. Several global insurance carriers are beginning to raise this need/issue and are looking to address it in some of their insurance product offerings. Regulations have been established requiring that insurance premium taxes for EU-based policies need to be allocated and paid based on exposures in each country, not just the country where the policy is issued. Since the original ruling on this issue in 2001, there have been concerns raised that this type of tax liability exposure may expand beyond policies written within the EU to global policies written out of the United States. For the most part, this aspect remains unaddressed -- but the exposure is still lurking under the surface. Certain carriers are now beginning to discuss the situation. If this concept is indeed applied to U.S.-based policies, the premiums and tax liabilities would need to be reasonably and fairly allocated by country of risk on master DIC/DIL policies for all lines (not just D&O, E&O, general liability, and property). Such an undertaking would create additional administration by U.S. multinational risk managers and their brokers. Furthermore, there may be tax liability issues on local policies that are currently being arranged as part of master programs and priced as "minimum premium" policies. It could possibly be argued by local tax authorities that these minimum premiums, and subsequent tax liabilities, are not being properly allocated relative to the risk/exposure base -- and are arbitrarily either too high or too low in a given country. |
Insurance Red Flags When Doing Business in China• In general, firms in China do not purchase much insurance. More specifically (and troubling), many do not carry product liability coverage. • Certificates of insurance are readily available -- perhaps too readily, as some Chinese firms have been known to practice unethical behavior by providing false information about their insurance coverage. • In the event of a claim, the insured will likely "get what they pay for." Some underwriters will take a narrow look at the scope of coverage where the premium is deemed "too low" and will look to exclude coverage in ways that would not ordinarily happen as a business practice of U.S. or European underwriters. • Work injury benefits and procedures actually vary by city in China. |
Best Practices for Insuring Businesses in China• It may be worthwhile for risk managers to establish a relationship with their insurance broker's local representative in China, as a part of the process to confirm that the coverage being evidenced by their Chinese subcontractors is actually valid and in force. • U.S. firms that allow local management to negotiate and place coverage outside of a global program can reduce the risk by including some measure of control, input, or review of the local insurance coverage by corporate risk management. • Mitigate the impact of the local claims process by using a controlled master program. This enables your broker to leverage the global carrier and help resolve any local claims issues. • If a firm wishes to fully insure its work injury obligations in China, it should purchase Employer's Occupational Injury Liability (EOIL) insurance to fill the gap between national requirements and local coverage. |