Study 8 - Global Liability and Alternative Risk Financing Flashcards
5 Territorial Extensions in the CGL wording
- Injury or damage in international waters or airspace is included subject to the following restriction: The course of travel or transportation must have been to or from Canada or the United States
- Goods or products causing injury or damage anywhere in the world are covered as long as they are manufactured or sold in Canada or the United States
- A person conducting business on the insured’s behalf is also covered anywhere in the world as long as his or her home is in Canada or the United States
- A civil proceeding in Canada or the United States that engages the insured’s responsibility to pay compensatory damages is covered, even if the actual event that caused the loss did not occur within the basic territory covered
- The insurer also has the option to cover an action brought in another country. Such an agreement would have to be in writing
The coverage territory in the CGL policy
States that the occurrence must take place in the coverage territory as defined in the policy.
This would mean coverage applies to:
- Canada and the United States, including its territories and possessions; and:
- International waters and airspace
One method of arranging coverage on global programs is to:
issue a master policy in Canada and have local insurers issue policies in each country in which the insured has permanent operations
A difference-in-conditions endorsement attempts to:
equalize conditions so that if a local policy has more restrictive terms than the master policy, the endorsement will provide additional coverage to match the coverage that is available under the master policy
A reverse difference-in-conditions endorsement expands:
coverage of the master policy to be as broad as the broadest local policy issued
Non-admitted insurers
An insurance company that is not licensed or otherwise authorized to do business in the jurisdiction in question
- Not widely used in Canada
- Some provinces have enacted legislation to prevent use of NAI’s, and will impose an excise tax on premiums paid
- Insurers domiciled abroad who do not operate a domestic branch are not subject to the checks and balances imposed by the Canadian government
Reasons one would look to the non-admitted insurer market
- It is difficult to obtain the particular type of coverage
- Coverage for a particular risk has been declined by the domestic market
- Broader terms of coverage are required
- Lower premium rates may be available
- Operations in a foreign country necessitate the purchase of local insurance products
- Domestic capacity is inadequate to service the need for large limits of insurance to cover a very large exposure
2 basic ways to finance risk
1) Risk retention
2) Risk transfer by insurance
Service providers in a structured program would likely include:
- Brokers
- Adjusters
- Inspectors
- Loss control consultants
- Law firms
Alternative Risk Financing
Encompasses any transaction where a given exposure is financed through means other than traditional insurance
Only larger entities who have sizeable risk capital are likely to consider an alternative risk financing option
Banks, O&G companies, manufacturing companies, export companies, and even insurance companies are examples of companies that consider more complex risk financing strategies
Types of risk financing programs
- Self-insurance
- Affinity groups
- Captives
- Finite risk insurance
- Derivatives and securitization
Fronting
A method of writing insurance whereby an insurer in all external relationships appears as the insuring entity while, on the basis of an internal agreement, the entire risk or part of it is passed on by way of a reinsurance contract
Affinity Groups
- Mutual risk financing organizations (risk retention groups) or buyers’ groups (risk purchasing groups)
- In the 1980’s in Canada, as a result of the liability insurance crisis affecting government and quasi-government bodies, groups such as municipalities, hydro-electric commissions, schools boards, universities, and hospitals formed insurance reciprocals.
- They operate much the same as insurance companies: they issue policies, charge premiums, and pay claims. Also subject to government regulation to guarantee their financial stability
Captive Insurance Company
An insurance company that provides insurance to, and is controlled by, its owners
The insurance subsidiary formed by a company primarily to handle its own risk
Long-term risk financing tool, demonstrating the commitment of the parent company which must incorporate and capitalize the captive
Types of Captives
- A single-owner captive (single-parent) captive insures only the risk of the owner or the owner’s subsidiary operations
- Association captives (affinity groups) are formed by members of a common industry or trade association to share the risks of that industry or association among its members
- Captive pools are formed for the exchange of insurance business among captives to spread and diversify their risks by participating in non-related business
- Excess of loss captives (maxi-captives) are formed to provide capacity where insurance coverage has never been available or is no longer available in the commercial insurance market at a reasonable price.
- A rent-a-captive is owned by unrelated parties and it provides captive facilities to others for a fee
