Property fronting arrangements are key as risks evolve

A multinational beverage company, monitoring the uphill march of property insurance rates and restrictions, decided change was in order: It wanted to move its property insurance coverage out of the traditional insurance market and into its captive, which is essentially an insurance company owned entirely by the company or companies it insures.

It's not the only company modifying its property risk management strategy in what is known as a hard market. As commercial property insurance rates remain elevated with tighter terms and conditions, many multinational companies are by choice or necessity adjusting in a variety of ways. Many are retaining more or all of their property risk (sometimes through higher deductibles or a captive) as individual insurers take less of it (sometimes by reducing capacity or spreading risk across a panel of reinsurers).

But multinational companies can’t do it alone. In many countries, they need to provide a certificate of insurance from a carrier licensed in that jurisdiction. They may need help with claims handling, risk control and excess risk transfer. So their risk manager may seek a fronting arrangement with an insurance provider that has extensive international capabilities and experience customizing global programs and services, one that can help ensure compliance with tax laws and other insurance regulations that vary country to country. Fronting arrangements are helping to make a shift in property risk management strategy possible — and in some ways preferable — for the businesses involved.

"The trend right now in commercial large property comes down to this: More people have skin in the game,” said Joffre Mishall, Head of Property for U.S. National Accounts at Zurich North America. “That can be a good thing, because it means everyone has a stake in managing property risks well and taking proactive steps to build resilience to the factors that are driving up property rates.”

While many factors are involved, two key forces are spurring exploration of new property risk management approaches.

Extreme weather fuels the trend

One of the most notable factors driving the hard market for property is extreme weather and the jaw-dropping losses these events are causing. In 2022, the U.S. alone experienced 18 separate weather or climate disasters that each resulted in at least $1 billion in damage, according to the National Oceanic and Atmospheric Administration National Centers for Environmental Information (NCEI). Between 2017 and 2022, there were just 18 days on average between billion-dollar disasters compared to 82 days in the 1980s.¹

“As the risk is more widely shared, there’s greater incentive now to ensure that properties are strengthened against local weather-related perils before they hit – not just hurricanes but also tornadoes, hailstorms, surface water floods resulting from convective storms, and wildfire,” Mishall said. “There’s also motivation among all parties to ensure property values are regularly updated to keep up with inflation and replacement costs, a discipline that we saw fall off a few years ago with very painful consequences for the property insurance industry.”

According to the Insurance Information Institute, cumulative increases in property replacement costs exceeded overall inflation in the U.S., Canada and Japan between 2018 and 2022. The U.S. experienced the highest cumulative increases in property replacement costs, at 30.4% during that period.²

“This brought some very unpleasant surprises about underinsured, undervalued properties after a claim was filed, and it forced some significant corrections that contributed to premium increases and changes to terms and conditions in the insurance contract,” Mishall said.

Geopolitical tensions play a role

Amid economic or political tensions in China and eastern Europe, many U.S.-domiciled multinationals are diversifying or expanding into other markets.

“We’re seeing this transition in Zurich’s fronted property portfolio, where new countries are popping up for our multinational customers,” Mishall said. “We’re issuing policies in places we hadn’t historically.”

A recent survey cited by a McKinsey paper indicated that in 2022, 45 percent of U.S. multinational companies perceived China as one of their top three investment priorities, a steep drop from 77 percent in 2010.³ Many U.S. and other businesses have begun looking to India, Vietnam and elsewhere in the Asia-Pacific region for manufacturing capacity, raw materials and markets for their goods. They also are looking closer to U.S. shores. In 2022, for the first time in a decade, Mexico and Canada surpassed China⁴ as America’s largest trade partner.

“Companies have grown concerned about concentrating their supply chains or operations in a distant region where a single weather or geopolitical event could potentially shut down essential operations,” Mishall said. “Some are looking to shorten their supply chains to help avoid the kinds of delivery delays seen during the COVID-19 pandemic.”

While at first glance this looks like simple risk diversification, it can add complexity for risk managers securing coverage in new regions or more jurisdictions than before.

This is where a risk management approach involving a front can help simplify matters. With a front, one insurer may implement the foreign local policies through its network of local affiliates or vetted partners, then cedes the global exposure to a panel of reinsurers. If a captive is involved, then the fronting company cedes all or a portion of the risk to the insured’s captive reinsurer.

“Companies that pursue sophisticated property strategies such as a captive or a fronting carrier need to vet the carrier to ensure it can provide the service types and levels needed,” Mishall said. “I’m proud to say Zurich is a recognized leader in international programs, captives and compliance.”

Seven points to seek in a fronting carrier

What should a multinational company seek in terms of fronting companies? Here are seven points to keep in mind.

1. A global network with local knowledge

It helps to work with a fronting carrier who has people on the ground within the countries where you’re operating. Local knowledge matters for many reasons, one of which is that certain countries have requirements that may diverge from what is on the Master Policy. For example, the Philippines requires mandatory percent deductibles for natural catastrophes that are typically lower than the master policy.

Zurich has people in over 200 countries and jurisdictions globally and has been underwriting international insurance programs for about 50 years.

“Our robust global network includes more than 50 Zurich-owned offices managing 90% of premium and claims,” said Leslie Carlson, Head of International Programs Services at Zurich North America. “In addition to those offices, we have five Zurich-owned hub offices to manage a strong network of partners in any other country where we need to issue a local policy.”

2. Clarity and consistency in policy language 

Finding a seasoned international carrier that offers a property policy that has been adapted for use in multiple countries can save significant time for a multinational company. Otherwise, the risk management team and broker must vet local policies in each country with an eye for differing definitions, limits, terms and conditions that can introduce interpretation issues, inconsistent coverages and new requirements.

Zurich’s Prime property damage and business interruption policy has been translated, adapted and filed throughout the Zurich International Programs network, in close to 100 countries and more than 15 languages.

“This means our customers are going to get an integrated and globally consistent set of coverages, extensions, definitions and specifications aligning the master and their local policies,” Mishall said. “This lines up with what a global risk manager would expect to have and helps simplify, which is what we strive for at Zurich.”

3. Expeditious claims payments

Working with a fronting carrier that can issue policies and pay claims locally in various countries can expedite both timelines.

“If you have a fragmented program, you might have to go through many people for a claim to be paid,” said Kay Eisenstein, Captive and Reinsurance Manager at Zurich North America. “With a fronted program, Zurich is able to issue local policies as well as pay claims locally and then seek reimbursement from the panel of reinsurers.”

Paying claims and premiums locally also can simplify the customer’s compliance with tax obligations. It helps that Zurich has more than 7,000 claims professionals in over 30 countries.

4. Holistic, customizable solutions

While an integrated international program can deliver efficiencies, consistency and peace of mind, some customers don’t want a global program with a master policy in the U.S. They prefer to have non-integrated policies issued in some countries where they have operations or substantial assets.

One dynamic that can influence this approach is that property rates in some countries haven’t increased to the same extent as in the U.S. Another factor is capacity constraints for catastrophe coverages. Some multinational companies choose to carve out certain types of coverage or certain regions from their international program.

Zurich’s breadth and depth of solutions enable the design and delivery of property protection and services in many ways, whether it’s through market-leading captive services, award-winning international programs, or its extensive global network of local offices and relationships

5. Dedicated international specialists

Sometimes, reading the fine print of the policy language can reveal compliance gaps and coverage contradictions between the master policy and local policies or the reinsurance panel’s terms and exclusions. International expertise is required to spot potential problem areas.

“Full concurrency can be challenging to achieve, but it’s important to be aware of non-concurrencies and the potential impact to the program,” said Stephen Penwright, Property Technical Director for U.S. National Accounts at Zurich North America. “The fronting carrier’s underwriter should work with the broker early to speak directly to the global brokers who access European and Asian markets and discuss any exclusions.”

Zurich has 2,500 professionals globally who are certified to manage international programs and more than 75 international servicing specialists in the U.S. who help ensure the policy structure and language deliver a reliable, compliant solution and contract certainty for the customer.

6. Digital tools

Companies vetting a fronting carrier may want to ask whether the provider has digital tools that can simplify access to information about their program anytime and anywhere in the world.

Zurich set out to be a digital leader in international insurance and provides customers and brokers 24/7 access to MyZurich for their portfolio details. A proprietary digital tool called Global Program System (GPS) helps customers identify and comply with local tax requirements and regulations in all the jurisdictions where they operate. Zurich Risk Room is another analytical tool with risk data and conditions in more than 170 countries to model scenarios and provide insights for the customer’s decision making.

7. Resilience services

Insuranceis only one piece of property risk management strategy. For added value, a company should seek a fronting carrier with additional capabilities such as reputable, extensive risk engineering services.

Zurich Resilience Solutions, which includes 850 Risk Engineers with offices in 40 countries, provides a range of advisory services related to loss prevention, safety, sustainability and ESG (environmental, social and governance) issues. These include climate advisory services to help businesses identify the biggest climate- and weather-related threats in the regions where they operate with recommendations to mitigate the risks.

Learn more about Zurich’s Property capabilities today. 

References

1. Smith, Adam B. “2022 U.S billion-dollar weather and climate disasters in historical context.” National Oceanic and Atmospheric Administration National Centers for Environmental Information. 10 January 2023.
2. Leonard, Michel. “Inflation and Insurance Replacement Costs.” Insurance Information Institute. 25 April 2023.
3. Woetzel, Jonathan, Joe Ngai, Jeongmin Seong, Kweilin Ellingrud, Nick Leung, Franck Le Deu, Sven Smit, and Peixi Wang. “The China imperative for multinational companies.” McKinsey Global Institute. 15 January 2023.
4. Sonnenfeld, Jeffrey, Kyle Bass and Steven Tian. “Corporations still have to perform China’s dance – but not if the music stops.” Fortune. 30 May 2023.