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Controlled master program includes best of both worlds

Posted On: Feb. 4, 2007 12:00 AM CST

NAPLES, Fla.¬óDirectors and officers insurance coverage is gaining popularity overseas as more countries begin zeroing in on corporate governance and fraud, an industry expert told the American Bankers Assn. during its annual conference.

Carol Zacharias, New York-based senior vp and chief counsel at ACE USA, said D&O coverage is gaining momentum outside the United States mainly because more countries are passing laws that allow class action suits. Spain and the Netherlands are recent examples, and more are in the works, she said

The laws, however, vary, and bring another variable to overseas risk management, she said.

"There is no one answer that fits all countries," she said at ABA's Insurance Risk Management Annual Conference Jan. 21-24 in Naples, Fla., during a workshop for bank risk managers with operations overseas or those planning to acquire international banks. "You need to know your local law."

As for an increase in foreign D&O claims, Ms. Zacharias said, "The sky is not falling yet (but) the overseas cases are there and they're growing."

D&O coverage was one focus of the workshop, in which the most attention was given to insuring overseas liabilities.

Bankers were advised that if their businesses want to operate abroad, a combination of foreign and domestic insurance products is their best bet.

"There are a lot of considerations you have to think about," said Bonnie Preston, Duluth, Ga.-based vp for global accounts at St. Paul Travelers Cos. Inc., who warned banking industry risk managers to pay special attention to overseas regulations to avoid holes in their risk management plans. "The structure of international (insurance) programs is one of the key things that makes going international different."

She said there are three types of insurance programs for companies with operations overseas: admitted, nonadmitted and a controlled master program.

Admitted programs feature policies originating in the foreign country by locally licensed carriers with coverage that is compulsory in the country. Nonadmitted programs feature policies established and run in the United States, providing coverage for locations abroad.

Each has many advantages and disadvantages. An admitted program is advantageous since the policy and terms are in the local language and currency, and are backed by local laws that govern limits and legally required specialty products. But U.S. companies may have trouble overseeing policies abroad especially with varying policies from an array of insurers. "Too many different insurers and policy dates may be hard to keep track of," Ms. Preston added.

Meanwhile, nonadmitted programs are easily understood by U.S.-based risk managers and can be cheaper when purchased alongside coverage for domestic operations. But the chief concern is they don't always meet the demands of foreign regulations and are illegal in some nations, she said.

"The best of all worlds is to have a combination of both (admitted and nonadmitted) in what we call a controlled master program," Ms. Preston said.

This hybrid combines advantages of admitted and nonadmitted programs and seals the cracks where either falls short. Controlled master plans are easier to facilitate and control, and can be purchased in bulk without duplication, as with most U.S. plans, she said. This approach, which involves local management and U.S.-based risk managers, is favored among companies because it addresses domestic and foreign concerns in operating overseas.

"It really does help when you have the carrier, the producer and the U.S. risk manager in sync," Ms. Preston said.