1. Managing a Global Insurance Program 0 New Jersey RIMS January 14, 2014 Tracey Estes Regional Underwriting Manager AIG WorldSource Bruce Wineman Sr. Managing Director Aon Risk Solutions

2. 1 Agenda  Introduction  What is the big deal about International?  Considerations - 5 key concepts  Comparing insurance environment in China and United Kingdom  What can go wrong?  Emerging trends  Framework and tools for making decisions

3. 2 Introduction  Under the best of circumstances, arranging a large insurance program presents a challenge to any Risk Manager, broker or insurer alike. But when the development of a program becomes or is complicated by foreign business customs, financial regulations and language barriers, the matter can become overwhelming.

4. 3 What’s the Big Deal about International? Obvious  Economic – EU, NAFTA  Currency – Fluctuations/Devaluations  Language – 1,652 dialects in India  Political – Socialist, Conservative  Exposure – Earthquake, Cyclone, Flood  Time Differences

5. 4 What’s the Big Deal about International? Not So Obvious  Legal Differences – Napoleonic Code, Sharia  Regulatory Environment  Data Collection  Cultural/Distance Issues  Attitude to Risk and Safety  Social Legislation  Taxation

6. 5 Risk Spectrum – Who needs a Global Program? BUSINESS ACTIVITIES InternationalGlobalMultinational LESS COMPLEXMORE COMPLEX Limited exposure to loss or liability outside of USA Exports, International Travel, Foreign Suppliers Assets or operations outside of USA, but not inextricably tied together Operations usually not heavily interdependent, foreign operations may be material to the balance sheet. International locations, Material to balance sheet, Operations interdependent Recognizable name, target for lawsuits, finances transcend borders, larger geographic spread

7. 6 Can’t I Just Use My Domestic Program? Maybe – but issues arise with:  Coverage  Compliance  Taxation  Cost  Markets  Program Management

8. International Considerations 7

9. 8 Key Concept Number One – Compulsory Insurance Compulsory Insurance =Those lines of insurance that are required by law for companies operating in a particular territory – typically Automobile Third Party Liability, Work Injury and some forms of Professional Liability. Trend towards compulsory requirements for Environmental and even D&O in certain countries.

10. 9 Key Concept Number Two – Admitted Insurance Risk based in Country A Policy issued by Insurer licensed or registered in Country A Risk based in Country A Policy issued by Insurer NOT licensed or registered in Country A Admitted Non-Admitted “In over 85% of countries non-admitted cover is prohibited or restricted”

11. 10 Key Concept Number Three – Tax Treatment of Non-Admitted Loss Proceeds Parent Entity International Subsidiary Non- Admitted Loss Proceeds Income Tax Capitalization (or Other) Tax plus Frictional Costs

12. 11 Key Concept Number Four – Excess/DIC Master Policy D I L D I C Policy Limit Breadth of Cover Local Admitted Policies

13. 12 Key Concept Number Five – Financial Interest Insures the parent’s interest in a subsidiary located in a non-admitted country – local subsidiary is not an Insured Insures the balance sheet of the parent, rather than a local asset/interest Settlement to the parent only, no local servicing Policy wording developed and supported by individual legal opinions Subsidiary Global Insurer Master Policy Parent / Policyholder

14. 13 International Risk Considerations Other Particular International Issues/Considerations:  Role of Broker  Cash before Cover  Taxes: - Premium - VAT/Goods & Services - Fire Brigade - Catastrophe Pools  Tacit Renewal  Tariff Rating  Premium Allocations  Underwriting Data  Wording Differences in standard policies

15. 14 Communications  Social and Geographic Considerations - Time Zones - Hierarchy - Holidays - Sense of Urgency - Acronyms/Terminology - Reliance on e-mail  Managing Expectations - Clear and concise communications - Timeline

16. Insurance Environment in China and the UK 15

17. Risk Review - China Regulatory Constraints  Key Compulsory Coverages – WC/EL (State Plan), Motor  Non-Admitted Insurance Position – Not permitted  Tariff Rating – national premium tariff as set by CIRC applies to compulsory motor third party liability  Wording – controlled by CIRC  Cash before Cover - Advance premium payment prior to binding risk required under certain policies by province Market Features  Brokers only engaged in <5% of commercial business  60 licensed insurers – 3 largest (PICC, Ping An, China Pacific) have 68% market share  Insurer licenses are granted by province – not all companies are licensed nationally  Evidence of Insurance: Typically a cover note issued by insurance carrier

18. Risk Review - China Cultural Considerations  Legal Environment –Claim consciousness low  Attitude towards Safety – new concept  Attitude towards Loss Control –new concept Taxation  Premium Tax: Small stamp duty of.1% of premium  VAT/Goods & Service Tax: There is no VAT on insurance premiums, though insurers are liable to pay VAT on material damage claims submitted by non-VAT registered policyholders.

19. Risk Review – United Kingdom Regulatory Constraints  Key Compulsory Coverages – WC (State Plan), Employer’s Liability, Motor  Non-Admitted Insurance Position – Permitted, except for Compulsory lines  Tariff Rating – Open rating  Wording – Open wording  Cash before Cover - None Market Features  Brokers engaged in over 80% of commercial business  Over 1,000 licensed insurers – 10 largest have less than 50% market share  Evidence of Insurance: Typically a “To Whom it May Concern” letter issued by an insurance broker

20. Risk Review – United Kingdom Cultural Considerations  Legal Environment – High claims consciousness  Attitude towards Safety – well developed concept  Attitude towards Loss Control – well developed concept Taxation  Premium Tax: 6% applicable to all lines  VAT/Goods & Service Tax: There is no VAT on insurance premiums, Claims paid to policyholders registered for VAT are settled net of this tax as they are able to reclaim any VAT incurred. Otherwise, claims payments include any VAT involved. The claims cost for identical events can, therefore, vary according to the tax status of the insured.

21. Key Market Features - China v United Kingdom ChinaUnited Kingdom Compulsory coverages insured in Private market AutomobileAutomobile and Employer’s Liability Non-admitted insuranceProhibitedPermitted (except Compulsory lines) Cash Before CoverAppliesDoes Not Apply Insurance awarenessLowHigh Market sizeSmallLarge Broker engagementLowHigh Safety & Loss Control awareness LowHigh 20

22. What Can Go Wrong? 21

23. 22 What can go wrong? Examples  Admitted/Non-Admitted Insurance  Tax  Excess/DIC cover  Scope of local coverage  Cash Before Coverage  Tacit Renewal

24. Emerging Issues 23

25. Emerging Issues – What’s Next?  New Markets/Opportunities: Brazil, China, India and more  Outsourcing, Off-shoring: Program impact – Contracts, Certificates, Claims  Protectionism: Regulation in Brazil, Argentina, African countries  Alternative Program Structures: fronting, cash flow, captives  Lines of Insurance: D&O, Local Umbrella, Professional Liability, Environmental (‘ELD’), Business Travel Accident and more 24

26. Emerging Issues – What’s Next?  Tax: Increasing audits  Global Insurance Marketplace: New entries into the market create different access points  Carrier Capabilities: Worldview, MyAIG, MIA and more  Role of the network insurance broker: advice & counsel in addition to service & administration  Program Performance: beyond just compliance 25

27. Framework & Tools 26

28. 7 Dimensions of Success Program designs are based on review of cross-border business flows and processes, addressing critical issues such as contractual obligations, interdependence and contingent clients’ exposure. Program designs are comprehensive, including coverage as required, available and appropriate to address exposure across multiple lines of insurance and policies. Program options factor in contractual obligations and regulatory requirements governing permissibility of admitted /non- admitted insurance, compulsory coverage, and tax. Optimized programs that balance corporate objectives, risk characteristics and appetite, compliance, market offerings insurer relationships and available solutions. Information regarding local policy and exposure data, events, changes in industry, business environment, regulatory, legislative and other subjects worldwide that affect client’s risk-related and corporate decision- making Programs designed to offer efficiency in program cost, execution and administration Structures are tailored to minimize coverage overlaps while ensuring program responsiveness and compliance where possible, with clarity in how multiple policies will respond

29. 28 AXCO  AIG Multinational Design Tool description/screen shots

30. 29 Program Design Tool  Explores the recommended approach for designing a multinational program, considering local regulations, tax, coverage and claims issues.  Provides risk managers with a comprehensive and holistic view of the variables impacting their decision to insure their companies’ risk exposures locally or globally.  Illustrates how particular exposures, business strategies and risk sensitivities impact a multinational’s program structure. Available at: www.aig.com/multinational/pdt

31. Calling All Stakeholders Determining the optimal solution for your risk is complex and involves multiple stakeholders. Legal Tax / Finance Risk Management Logistics Facilities Human Resources Other – depends on organization structure Open conversation early in the program design/renewal process is key. 30

32. 31 Practical Steps  Get out there! –Visiting locations aids your knowledge, credibility and leverage –Your travel saves money  Different countries, exposures, practices and surprises –Country-specific info via Brokers and Insurance Carriers –Local operations’ expectations, e.g., deductibles  Communicate – teach and sell Risk Management to all –Be seen as focused on helping local management with ops & goals; not simply enforcing insurance compliance. –Establish local contacts; Avoid assuming all the responsibility –Keep management apprised – Local and C-Suite –Get on Business Development’s radar –Create a Risk Management webpage –Remember email’s limitations – keep it simple

33. 32 Practical Steps  Periodically assess your program & players –One size doesn’t necessarily fit all –Int’l acquisitions – assess before adding to the program –Special coverages – e.g., Pure Financial Loss, Extended Products, Political Risk –Insurer panels –Using global insurer regional offices; broker networks  Helpful Risk Management Activities –Strategy meetings –Risk Forums

34. Toward Program Performance 1 Establish Clear Risk Finance / Structure Objectives with KPI to measure success 2 Utilize Pragmatic Process to Establish Options to Meet Objectives and Document Decisions 3 Ensure Strong Formalized Communication with Overseas Local Business Units Relative to Risk Management 4 Ensure Linkage With Internal Stakeholders Including both –Management –Operational 5 Clearly Document Program Intent – including roles, responsibilities and financial considerations 6 Monitor & Measure Performance 33

35. Questions?