An effective way to test a multinational insurance program is running through different risk scenarios and seeing whether the ensuing regulatory, tax and financial ramifications are in keeping with the corporate policyholder's objectives.

The “overarching theme” in designing any multinational program is “when you have a claim, it does what you expect,” said Alban Laloum, Marsh Inc.'s multinational client services leader in New York.

Policy terms and conditions must be customized for the buyer's needs, but the program structure usually consists of a master policy that provides difference-in-conditions and difference-in-limits coverage over locally issued policies, customized for both the customer's business and the nations in which risks are covered, said Michael Furgueson, president, Ace USA's multinational client group in New York. Specialty coverage now generally follows a similar structure, he said.

“Years ago, an 80-20 rule applied, meaning that 80% of the risk was left in the master program,” said Bill Skapof, head of international programs for Zurich North America in Philadelphia. “Today, it's exactly the opposite.”

Rick Jensen, managing director at Willis North America Inc. in New York, said 85% to 90% of countries require that companies doing business within their borders purchase local coverage for most lines.

Clyde Ebanks, chief operating officer of Aon Global Client Network in Chicago, offered a caveat: “One of the traps any client can get caught in” is focusing on whether admitted coverage is required without examining all the options and their impact, he said.

Brokers and insurers say regulatory enforcement has increased worldwide. While compliance is important, it should be viewed as part of the process of achieving risk management goals, not the goal itself. That is why it is important to run through different coverage scenarios that take into account compliance, exposures, claims payment and tax issues.

Vinko Markovina, New York-based global practice leader for international insurance solutions at Allianz Global Corporate & Specialty, said scenario testing is crucial, because “whatever we decide has to make sense due to value and exposure. It has to make sense to the local authorities.”

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For example, if the insured value in a country is low, but premium allocation is high, it should be explainable to regulators in terms of exposure level or they will think the purpose is tax evasion. Amid stricter financial governance rules, those decisions also must make sense to the business' subsidiaries, which may want to know how premium was allocated.

With the complexities of multinational coverage, using analytics to identify and measure risk “helps determine what we need and why we need it,” Marsh's Mr. Laloum said.

To illustrate the challenge, Willis' Mr. Jensen said a Fortune 100 company with serious risk exposures could have a $100 million liability loss in any jurisdiction. But if it is operating in 75 countries, it's not buying $100 million in coverage in each. It may buy $10 million in liability coverage, leaving the rest to an excess policy. But excess insurers that are not locally admitted may have to pay a claim in the parent's home country, which raises tax issues.

“Many companies have put together good insurance programs, but haven't thought about claims reporting and ensured that that process gets well communicated” throughout the organization, said Bruce Wineman, New York-based manager of U.S. and Canada at Aon Global Client Network.

Make sure claims notification clauses specifically tie the time limit to when the risk management department in the policyholder's home country hears about the claim, Ace's Mr. Furgueson, said, “Clients are looking for greater transparency” in the claims process.

Alfred Bergbauer, head of multinational casualty for X.L. Group P.L.C. in New York, said: “You have to distinguish between underwriting and transacting, and executing,” as multinational programs require customized service throughout the policy period. “The service execution requires the ability to deliver across many countries at the same time to fulfill client needs.”

The claims process aside, keeping multinational programs efficient and holding down frictional costs, which include broker fees, claims services, administration costs, taxes and reinsurance fees, also can be challenging.

“The core of the insurance industry's history is cross-border, multinational risk, said Kevin Strong, director of global programs and network services for X.L. Group in New York. Each nation's regulatory structure and the rigidity of some developing local markets can prevent multinational companies from operating as efficiently as possible, Mr. Strong said.

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“The cost of some of these programs can run $1 million plus,” said Marsh's Mr. Laloum, “and that is just the administration.” A way to reduce frictional costs is to negotiate fronting fees, which typically run 5% to 10% of the policy, he said.

Policyholders have to remember that the point of risk transfer is to protect the overall organization, said Aon's Mr. Ebanks. “There does need to be some level of practical assessment,” such as “do I need to localize my entire liability tower for one issue.”