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A second look at Single European policies.

Recently, much discussion has taken place with respect to the advantages of implementing a single policy approach in Europe under provisions afforded by the Second Non-life Directive. The benefits most often cited are consistency of coverage for all European operations, ease of administration and consolidated buying power.

However, for multinational organizations the seductively simple concept of obtaining single policy coverage for all European locations may turn out to be illusory in practice. In many cases, the advantages to be gained arise simply from the movement away from a mix of separate policies to a more consistent program. In fact, for companies with a well-structured global and/or worldwide control master program, it is highly unlikely that a Europolicy would offer significant advantages.

Consequently, although conventional wisdom touts the benefits offered by single European policies, there are many shortcomings to these programs. This is not to say that the single policy approach is to be avoided in all cases; there are many instances where these policies are the best viable option. Nevertheless, in order to determine whether a single policy makes sense for a given organization, the risk manager must undertake a thorough analysis of the many complex issues involved.

Before proceeding, it is important to define two terms. The first, the Europolicy, is any single European insurance policy issued in Europe, specifically among the nations in the European Community (EC), that covers locations or operations in more than one country. The second term, the Europrogram, will denote any master policy - either on a stand-alone basis or as a component of a worldwide program - that has supporting underlayers issued in all countries where a major risk in the program is located.

Limits Afforded

Typically, a Europolicy provides a single limit of liability applicable to Europe as a whole - a shared limit for the participating countries and operations. Consequently, consideration must be given to how limits are set up in order to avoid inadvertently reducing the coverage provided.

Consider as a hypothetical example PanEuropean Inc., with operations in six EC countries, moving from a separate products liability program in each country with local limits of US$1 million, to a Europolicy with an identical limit of US$1 million. The new aggregate limit of liability available to the group on a pan-European basis has been reduced by US$5 million. While this problem can be easily solved through the purchase of additional limits of liability, the initial premium savings that are achieved may then simply be spent on buying excess coverage.

Similar problems can occur with property insurance. Here, the company must determine whether the Europolicy should be written as a blanket limit for Europe, a limit to value per country and/or a limit to value by location. This decision becomes critically important for companies with exposure to a catastrophic loss that could cross borders. For example, a chemical company with a Europe-wide exposure to freezing could find its coverage vastly inadequate if a multi-country incident were to become subject to a continent-wide, single per-occurrence limit.

None of these problems is insurmountable, but they do require careful attention. The transition from separate policies to a Europolicy requires a restructuring of limits and capacity. In essence, it involves moving from a "horizontal "accumulation of the needed coverage (limits by country) to a "vertical" aggregation that is sufficient for all of Europe (very high per-occurrence limits).

Ease of


An insurance contract is a "live" document, and depending on the line of coverage, may generate substantial paperwork. Administration is normally easier when this paperwork is able to be handled in a routine fashion, close to the point of actual need.

Take the classic example of certificates of insurance. A French bank providing financing for a major plant expansion may be reluctant to accept a certificate of insurance written in German, issued under a policy arranged outside of France. In fact, the bank is quite likely to insist on a French language document and, at that point, what should have been a routine transaction becomes needlessly complicated.

This point might be best illustrated by drawing a hypothetical analogy in the United States. Suppose that at some point in the future, under provisions of the North American Free Trade Act, an organization's request to a Canadian third party for proof of liability insurance is answered with a certificate

provided in Spanish, under a policy issued in Mexico and denominated in pesos. Would the organization's acceptance level of this response be high? This is the same concern faced by many in Europe, and is further complicated by additional factors.

Consistency of


For example, the reluctance of a French bank to accept coverage under a German policy form might be aggravated not just by linguistic concerns, but also by the coverage itself. True, "all risks" coverage is still a relatively new phenomenon in Germany, and certain coverages that would be required for new construction in France - for example, decennial liability - are not common in Germany. It is reasonable to presume that a French bank providing financing would expect a French standard of coverage. Similar examples abound in Europe, and it is impossible to escape the fact that the insurance offered in any given country has been tailored over the years in direct response to local laws, legislation and indigenous business practice; as a result, insurance rarely translates well from one country to another without some modifications. This factor, more than anything, is the function of a local policy in a well-structured global and/or European program.

As a result, the underwriter who is asked to write a single European policy may be motivated to write to the lowest common denominator, thus assuring that he or she does not extend to all involved countries what may be a routine extension in only a few. For example, an underwriter who is willing to offer water pollution coverage for Germany is likely to refuse when asked to apply the coverage to certain other nations. Another example is the Italian insurance company willing to provide products liability coverage for a pharmaceutical company on an occurrence basis; this company may be hesitant, and rightfully so, to expand the same coverage to either the United Kingdom, where litigation is more prevalent, or to Germany, where the presence of a mandatory pharmaceutical pool would make integration of the coverages difficult.

In addition to determining whether or not to write particular coverages, the issuance of a single European policy also presents underwriters with the perplexing question of how to deal with those provisions they must write. For example, an Italian employer's liability policy makes frequent and specific reference to the Italian Civil Code, which dictates many aspects of claims settlement. Another example is Spain, where property programs require mandatory inclusion in a pool for catastrophic coverage (the "Consorcio" perils).

With these factors in mind, how does one successfully include the legal and coverage complexities of 12 diverse nations into a single policy issued in one language? As a solution, some underwriters have taken a "modular" approach to the problem, which essentially entails collecting diverse policy texts (sometimes in different languages) together under a common policy jacket and general conditions. However, depending on the coverage, the result can often be an unwieldy document of needless complexity.

Therefore, issuing a single policy is not always the simplest option available. in fact, absolute consistency in coverage may not always be achievable or even desirable. For example, an organization that obtains consistent coverage solely for the sake of uniformity runs the risk of sacrificing a coverage exception that it could have used to its advantage in certain countries.

Disputes with


Imagine a Europolicy placed with a carrier in the United Kingdom that covers a variety of European locations. Subsequently, as the result of a major loss in Italy, a large, and unfortunately disputed, claim situation arises. After exhausting all available commercial resources, the decision is made to seek legal action. But what will happen next? Would a British court be positioned to adjudicate the merits of a dispute arising from a series of events that took place in Italy? Conversely, would an Italian litigant, accustomed to a legal system predicated upon an elaborate and detailed civil code, feel comfortable in pressing his or her case with respect to a contract executed in the United Kingdom, where common law (past precedent) prevails? While many legal firms in Europe are skilled in handling cross-border disputes of this type, the cost and time involved in doing so can be considerable.

For a company entering a relationship with an insurer, it is never pleasant for its executives to consider what their ultimate legal recourse may be in the event that the relationship sours. However, organizations that are considering purchasing a single European policy should give this issue serious consideration. Unless this issue is specifically addressed in the contract by way of binding arbitration and/or specified jurisdiction clauses, one could inadvertently be left with a line of legal recourse that is at best simply cumbersome, and hazy at worst.

Currency and Tax


In the absence of a widely accepted and commonly used European currency, a single European policy becomes by definition a contract whose proper functioning will require numerous currency transactions. This is true for the entire cycle of the policy, whether from the beginning with the premium calculation or at the end with the settling of claims. As a result, if the contract wording is not correctly executed, it is possible for a portion of the exchange rate risk to pass from the underwriter to the insurance buyer. Should the EC be successful in achieving true economic union - and, in the process, a single European currency - this problem will resolve itself. In the interim, however, companies must pay careful attention to this matter.

The hoped-for harmonization of premium taxes in Europe has not yet occurred, and in fact may from the buyer's viewpoint be moving in the wrong direction. For example, Germany and Italy are among the countries that have recently increased their already substantial premium taxes. In addition, the single policy does not free the buyer from the obligation to pay taxes by country, calculated as per the premium reasonably generated for each. In the absence of a local policy document, the administration of this fiscal obligation is normally handled by the insurer issuing the Europolicy.

However, complications can arise for the insured in compiling the documentation needed to convince the local fiscal authorities that this obligation has been met; tax inspectors, not particularly noted for their flexibility no matter which country they are from, will, at the moment of an audit, want to see conclusive proof that premium taxes have been paid. At this point, the insurer may have to generate a local document/tax receipt not originally contemplated when the program was put into force.

Claims service

Despite the problems enumerated above, the true test of an insurance program is its efficiency when it is needed most - that is, when claims are due. Measured by this standard, a single European policy can generate some concern.

This is particularly true with respect to certain lines of coverage, such as transit, that generate a relatively high frequency of claims. For example, a locally issued document is written in policy text language that the on-site adjuster can reference with ease, as well as coverage terms with which he or she is readily familiar. Thus, the local policy becomes a vehicle that facilitates the settlement of the loss.

In fact, language problems by themselves can result in significant problems in the claims settling process. Be it an Italian adjuster in Geneva trying to settle a claim that falls under a Rotterdam-issued policy written in Dutch, or a German accountant trying to sort out what an American means by "gross earnings" in quantifying a business interruption loss, the absence of a local language policy text can become an impediment to the rapid and efficient settlement of claims. in a very real sense, a Europolicy might even be considered an incomplete project; for although the product has been designed, it has not yet been fully exported into each of the participating countries.

After careful consideration of all these factors, risk managers must then determine if the use of a Europolicy would be suitable for their organizations' risk management philosophy. When making this determination, it is important to keep in mind that in the process of issuing the policy, paying the premium and reviewing the coverage terms, an insurance policy requires active participation from local management. For many multinational corporations, this fact is viewed as a real benefit since this involvement makes local management aware of the cost of risk. Furthermore, since the policy sets retention levels, coverage terms, and the ancillary services provided as part of the insurance policy transaction such as loss control and the maintenance of claims data, it becomes a tool through which the home office's risk management philosophy is transmitted to each subsidiary.

In this regard, some local managers may find that with Europolicies, the management of risk becomes a more distant and ambiguous affair. In other words, the use of a single policy may reduce their involvement in managing risk to responding to one more allocation as a part of their corporate overhead charges. In addition, the multinational purchaser of insurance runs the risk of losing valuable input from managers in each of the countries where insurance and risk management services are to be provided.

Each of these problems, to one degree or another, can be successfully managed. In many cases, the most obvious solution is to move from a Europolicy to a Europrogram, which would entail utilizing local policies in areas where they are needed. However, those risk managers and executives who are in the process of implementing a Europolicy should not interpret this article as an argument against the use of a single policy approach in any and all situations; there is no right or wrong solution for all circumstances. In order to obtain the best possible insurance program, the risk manager must match the organization's risk management and insurance buying philosophy with its specific coverage needs and decide from there.
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Author:Hutchin, James W.
Publication:Risk Management
Date:May 1, 1993
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