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Global insurance programs require understanding of local markets

Global insurance programs require understanding of local markets

NEW YORK—There are different ways a global company can cover exposures around the world, but it needs to understand the various local markets in which it operates and how its business and products affect those markets to effectively manage its risks, the risk manager of a major global business said last week.

Speaking at Business Insurance's annual Risk Management Summit® in New York, Jorge D. Luzzi, group risk management director of Pirelli & C. S.p.A. in Milan, said: “To build a global program, we need to try to understand what happens on a global basis.”

“If you want to do business all over the world, you need to open your brain to what goes on in the countries where you go,” Mr. Luzzi said in delivering a case study during a session on “Risk of Global Expansion.”

In assessing a company's approach to exposures in various countries, it must consider local factors such as values, customs, how locals manage obligations, whether they're flexible, language and religion, Mr. Luzzi said.

A company also needs to understand local legislative factors, human factors, geographical issues, political risk, the impact of the company's products on the area, the company's image in the area and the local insurance market. “You need to understand what you sell to the rest of the world. That is very important,” said Mr. Luzzi, who also is the president of FERMA, the European risk management association.

The Pirelli risk manager said risks that companies must consider vary by region. In the United States, for example, those risks include terrorism, hurricanes and tornadoes.

Elsewhere, drug-related crime has caused terrorism and kidnapping risks to increase in Mexico, Mr. Luzzi said. Terrorism also is a risk in Colombia, while political risk issues come into play in countries such as Argentina, Bolivia, Peru and Venezuela.

Among risks companies must consider in Europe are the current economic issues in Spain, Italy, Portugal and Greece, as well as the potential impact on Germany of the economic crises in other European Union countries.

The Middle East and Africa is “a very complicated part of the world,” Mr. Luzzi said. “My company works in that part of the world, too. We have a huge factory in Egypt.” The Arab Spring uprising last year against the administration of former Egyptian President Hosni Mubarak tested his company's business continuity plan, Mr. Luzzi said.

Among the risks in Asia is Japan's efforts to find a new approach to nuclear power since the Fukushima nuclear plant crisis, he said.

Mr. Luzzi said there are various approaches to covering global exposures.

In a global program, he said, the worldwide risk is covered by primary policies in each country in which the company does business. Then, an umbrella or master policy above those policies covers differences in conditions or differences in limits.

In a pooling approach, the coverage is different in each country, but the company takes a worldwide approach with mutuality for the entire group.

Meanwhile, with a global policy approach, a single policy covers a risk worldwide.

Mr. Luzzi said that while a company with a global insurance program has different policies in each country, it must make sure the overall master policy doesn't cause problems with local regulators who believe too much coverage is being placed in the master, allowing the company to avoid local premium taxes.

With global exposures, “the most important thing is you need to be present,” Mr. Luzzi said, at least in the most important markets and following catastrophic claims. “A business contingency plan is very important.”

“To approach the world, you need to know yourself, know your company,” Mr. Luzzi said. “But also you have to have the curiosity to try to know others.”

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