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Managing risk where they don't play by your rules.

What risk management strategy should one employ in a land where religious law forbids insurance but commercial law requires it? What should risk managers do in countries whose laws and customs, such as the payment of blood money, are based upon one's gender and religious beliefs? What techniques will most efficiently protect overseas staff who will be automatically imprisoned following serious traffic accidents?

These are but a few of the risk management issues gaining greater prominence in the new world order where more corporations are doing business in more places than ever before. As risk management input becomes an increasingly important criterion for overseas investment, thorough knowledge of these markets will allow risk managers to play a more vital role in their companies' expansions.

From the perspective of a U.S. risk manager, the challenge of playing by someone else's rules may seem overwhelmingly complex - fraught with myriad local legal systems and unfamiliar religious or social customs. but the world's insurance industries have many common traits - and basic differences - that are easily identifiable, if one knows where to look. Local rules often derive from regional considerations that - if fully understood - can be appreciated and incorporated into effective risk management programs.


Many insurance industries are state monopolies where one or more nationalized carriers are responsible for every aspect of the insurance transaction. Monopoly and state-regulated markets are essentially efforts to control an industry capable of supporting local growth and development. Limited foreign participation and controlled reinsurance are additional tools utilized to keep premium in-country. Iran, Vietnam, India and - until recently - the People's Republic of China are classic monopolistic countries. Monopolies also exist in many African countries, as well as in the balance of Indochina and in the former Soviet Union. Rates, terms and conditions, and claim settlements in these markets are normally dictated by government entities.

In most instances, nationalized industries are further restricted by the absence of brokers and agents, and by the imposition of strict tariffs and severe penalties for the purchase of non-admitted insurance (i.e., insurance written by an insurer not licensed to conduct business in that jurisdiction). There is a distinct absence of broad coverage options, sophisticated risk finance alternatives and even rudimentary risk management practices. Reinsurance is usually controlled by the state, limiting access to competitive global markets as well as global programs placed in the parent corporation's home country. While some recent openings in markets such as Korea, Taiwan and China have become evident, risk managers will still find severe tariffs, limited coverage and a general lack of local expertise in these markets. Under these circumstances, companies with foreign operations have traditionally responded with the placement of non-admitted insurance coupled with difference in conditions and, in some instances, security covers.

Although non-admitted insurance has often been an accepted option, it does not always work; nor is it a safe or practical option when penalties can include fines, imprisonment of local staff, loss of physical assets or loss of local license and commercial registration, as seen in Kuwait, the Philippines, Vietnam and the emerging markets in Eastern Europe. Non-admitted insurance becomes an even less realistic alternative when a firm enters into a local joint venture where the politically correct and financially prudent alternative would be to buy local - regardless of all other considerations.


In developing business strategies outside one's home turf, and understanding of local religious and social customs can be as valuable as knowledge of the insurance laws themselves. It demonstrates a sensitivity, appreciation and commitment to those countries in which management wishes the organization to operate. Sharia law, practiced throughout the Muslim world, is one example of local codes of conduct unfamiliar to many U.S.-based risk managers. In countries such as Saudi Arabia, Pakistan, the Sudan and Kuwait, religious law forbids insurance, but commercial law requires it. And although a risk manager may be familiar with Napoleonic Civil Code as applied in France, the local application of this set of laws is quite different in Egypt and North Africa. Furthermore, the purchase of decennial liability insurance can be difficult and expensive largely due to a lack of both market capacity and faith in local workmanship and technology.

Other legal systems offer unique challenges as well. In countries such as Taiwan, Korea, China and the newly established states in Eastern Europe, lawsuits that would be considered civil in the United States are tried in criminal courts. Losers are not only obligated to pay all court and legal costs but can also be subjected to criminal proceedings if their case is deemed to be groundless or without merit.

China, Korea, India, Pakistan and other countries also prohibit any use of insurance intermediaries. In countries such as these, a risk manager must consider: How will policies be administered? Who will provide risk management services? Who will negotiate, settle and report on claims? Who will provide policy digests, claims summaries and loss prevention scheduling?


Perhaps the local rules that should be of greatest concern to risk managers are those related to industry regulation and solvency. There is a wide disparity in government supervision of insurance industries around the world. For example, India's industry, administered by the Ministry of Finance, is well-managed. Most of the four national carriers follow prudent financial policies - their capital and reserve, premium to surplus ratios and investment policies are all basically sound.

But whereas India's industry plays by British-inspired rules, risk managers will find that many countries play by questionable rules or worse ... no rules at all! Malaysia, for example, is emerging from a serious financial crisis that resulted from virtually no industry oversight. At least for the time being, Bank Negara, Malaysia's central bank, has brought order to a chaotic and financially perilous market. The Ministry of Finance of Taiwan has had to completely rewrite insurance company law regarding investment following serious concerns over this issue in the late 1980s. And Poland has suffered through its first bankruptcy in its emerging market.

It is important to bear in mind therefore that nationalized carriers should - but do not - have to pay claims. By contrast, competitive markets are obligated but perhaps cannot afford to pay claims. This is especially true in emerging markets where insurance industries are struggling to keep pace with new investment.

Nationalized insurance companies and their state-controlled private sector relatives are engines for domestic investment. Tariffs are a market tool to assist in the profitable underwriting necessary for that development. So while risk managers may not look forward to dealing with the General Insurance Corporation (GIC) of India, the Bao Viet of Vietnam or the Bimeh of Iran, they must try to appreciate these insurers' roles in the local economy.


To further illustrate the range of insurance rules faced around the world, it's helpful to explore specific countries that are currently in various stages of change or evolution - countries that play by different rules, new rules, or as mentioned earlier, no rules at all.

China, a country of great interest to many American businesspeople, remains an enigma to even the most ardent Sinophiles. China's insurance industry was until just recently monopolistic. The People's Insurance Company of China (PICC) was the only carrier, and its staff of 50,000 the only conduit for domestic and international insurance placements. Beginning in 1988, a hint of change was signalled by the Ministry of Finance when it began considering a slight market opening for alternatives to the PICC. However, hopes were abruptly suspended with the tragic events at Tiananmen Square and the consequent crackdown on economic liberalization.

But during the last three years, no fewer than three new insurance companies have begun operations in China. The Shanghai-based Bank of Communications, with

the Pacific Insurance Co., was first, followed by the Shen-zen-based Ping An Insurance Co. Both are locally owned, quasi-private-sector insurers. Last year, American International Underwriters received a limited license to insure foreign firms and foreign-Chinese joint ventures in Shanghai and to provide life insurance on a national basis.

Alternatively, India's insurance industry has been a state monopoly since 1953 when the GIC nationalized all existing carriers. The resultant arrangement of one life and four non-life companies provides an efficient, if somewhat outdated, network from which to purchase insurance. Rates are essentially set by the GIC, although some relief from the tariff is possible. Policies are based on standard British wording and are adequate for most purposes. Domestic capacity is quite large, supported internationally by a cartel of British brokers arranging virtually all treaty and facultative reinsurance. Solvency is not an issue in India where the GIC enjoys profits under strict government control, while operating in an underinsured, non-litigious society.

For all this, however, India's insurers provide limited additional services, and, in the absence of a brokerage community, there is no mechanism to serve the needs of global corporations with sophisticated risk management philosophies and practices. Although insurance consultants are permitted by law, the few currently in business offer little besides fire loss adjusting and marine cargo surveys. While insurance education is stressed, it is rudimentary in nature, viewing risk transfer as the basis of all "quasi" risk management systems. As such, India's market could benefit from enhanced insurance and risk management training. Yet, while conducting business according to local rules in India may be cumbersome, it is not onerous.


Upon arrival in Kuwait in the days immediately following its liberation, our consulting team of senior executives from Alexander & Alexander found an industry in chaos. The four government insurers that dominate Kuwait's industry were closed, their offices and records damaged or destroyed. Many of their staff had been killed, had fled abroad or were recovering from the tremendous shock of invasion, occupation and liberation. Only the Bahrain-Kuwait Insurance Co., domiciled in Bahrain, was spared the terrible destruction visited on the larger Kuwaiti insurers (Warba, Gulf, Al Aheia and the Kuwait Insurance Co.).

What's truly amazing is how quickly the industry recovered. Within two months. international treaties were renewed with greater capacity. Offices were reopened. Staff returned or were replaced. Policies, premiums and files were largely accounted for or restructured. The crisis was over, and massive claims adjustments and loss payouts were averted because so little in Kuwait is actually insured.

There are, however, some interesting points to make. The Kuwait Ministry of Finance was, in August of 1990, considering significant liberalization of Kuwait's strict insurance laws. This effort came to an abrupt halt when Iraq invaded the country and was permanently shelved after Kuwait's liberation. Today, Kuwait's industry remains highly regulated, financially sound and strictly administered. First, insurance for government contracts (virtually all of Kuwait's business) must be placed with a government carrier, while use of non-admitted insurance is severely punished through fines, imprisonment, and potential loss of local license and assets. Second, because so many of Kuwait's insurance professionals were either Palestinian or Jordanian, the industry suffered a huge personnel loss when the emir evicted individuals of these nationalities. In fact, the leading national company was nearly closed because its director was Jordanian. Yet even this crisis passed without serious incident - although the Kuwait Insurance Co. did lose its position as the lead government insurer for all energy sector business. So by the time our team had departed, Kuwait's insurance industry had fully recovered from Iraq's invasion, with its rules virtually unaffected by the events of the previous year.


The Republic of Ukraine is establishing an entirely new set of insurance rules by which to play. Historically, insurance was merely a vehicle used by the Soviet Union to raise revenue for the government - largely through crop insurance. Claims were rarely paid. An impressive new state the size of France, Ukraine now has an economy the size of Italy's and 57 million people capable of feeding themselves and maintaining what was the Soviet Union's industrial might in aviation, communications, steel-making and defense. The country currently has 70 insurance companies that continue to utilize rates set by the Russian carrier, the Ingostrakh, which was believed by many to be unprofessional to begin with.

In purchasing insurance for operations in Ukraine today, it may be wise to do so via a non-admitted program. However, in as little as six months, Ukraine's parliament could issue new insurance regulations and associated common law through which the insurance industry will be regulated and insureds will have legal recourse. Current legislative efforts include the desire to enact a set of laws to administer the industry and allow for the oversight of a financially sound market, including the Ukerderzstrakh, Ukraine's bankrupt state company. Ukraine's insurance law will be similar to common law, with various codes borrowed from the United Kingdom, France, Italy and Germany.

It should be noted, however, that the use of non-admitted insurance will be treated as it is in Kuwait, as a criminal offense punishable by fines, and loss of license and assets. Though not without a few bumps and bruises, the creation of new insurance industries throughout Eastern Europe is undoubtedly a step in the right direction for professional risk managers looking to protect corporate assets in these countries.


No discussion of global insurance would be complete without reference to the issue of political risk. The globalization of the world's economy, the collapse of the Soviet Union, and the resultant chaos in Central and Eastern Europe have combined to create enormous interdependency fraught with uncertainty. There is continued confrontation in the Middle East, anarchy in parts of Africa, religious war in India, and conflict in Indochina and the Korean peninsula. Such factors create a significant risk for global firms trading in an unstable world.

Political risk is of even greater concern because at a time of increasing global investment, risk managers will find less capacity and coverage available. But as with all risk, political uncertainty is a function of local circumstances constantly in flux. New markets will continue to evolve. The rules of the game, even at home, will continue to change. The successful application of market differences - the local rules - with all their subtle nuances will continue to make the game of global insurance so challenging.

Risk managers should continue to be creative in response to this challenge. Explore all potential coverage options and service providers. Learn about local insurance industries, legal environments and social customs in China, India, Vietnam and Khazakhstan. Consult with your global broker. Attend Risk and Insurance Management Society conferences around the world.

If managing risk where they play by different rules is analogous to a game, it is most certainly a serious game. But if risk managers or their brokers are familiar with the rules and exceptions, the players and arbiters, and know what one can and cannot do to play fairly, it is a game that all risk managers are quite capable of winning!
COPYRIGHT 1993 Risk Management Society Publishing, Inc.
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Author:Battifarano, Leonard J.
Publication:Risk Management
Date:Oct 1, 1993
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