Since the events of September 11, 2001, multinationals are well aware of the real risk that terrorism poses to their businesses. Many employers have implemented measures to reduce risk and emergency procedures in the event of a terrorist attack. However, many companies have not yet identified the potential liability of terrorism exclusions in employee benefit insurance policies.
Terror-proofing worldwide benefits
Since the events of September 11, 2001, multinationals are well aware of the real risk that terrorism poses to their businesses. Many employers have implemented measures to reduce risk and emergency procedures in the event of a terrorist attack. However, many companies have not yet identified the potential liability of terrorism exclusions in employee benefit insurance policies.
Multinationals provide risk coverage, such as life, disability, accident and medical insurance for their employees in the local markets and most, with the exception of expatriate plans, are insured with local insurance companies. These benefits are typically paid when an employee becomes ill or dies.
The vast majority of insurers around the world have either excluded terrorism in their policy conditions, or are in the process of doing so. If a terrorist attack does take place, a multinational would face two possible situations.
If employees have not been told explicitly about the policy exclusion, employees (or their dependent beneficiaries) are entitled to the benefits promised to them as part of their employment contract. The company will have to pay the benefits if the insurer does not, resulting in direct liability.
If employees do know about the policy exclusion, there may still be a legal obligation to pay the benefits, depending on the local legislative environment, the method of communication, and so on. At minimum, there may be a ‘moral’ duty to pay in order to protect the company’s positive image in the local market.
Apart from the terrorist exclusions, many policies limit the maximum amount that insurers pay per single event. If an office or factory is the target of a terrorist attack, it is quite possible that the total amount payable will exceed the limit.
And finally, in some countries, companies carry risk benefits on their balance sheets or pay them as current expenses instead of insuring them. The provisions held are usually based on average claims experience and do not account for catastrophes.
So, what to do? There are a couple of steps companies can take to protect themselves:
• Assess whether the insurance policies backing your risk benefit promises are adequate in case of a terrorist attack or similar catastrophe. In particular, watch for high concentrations of employees in a single location that could represent significant exposure.
• Develop strategies, once it is clear that potential liabilities exist, to address any exposure. You might eliminate non-insurable benefits, review employment contract wording, or develop global solutions to cover the overall risk.
A multinational case study
A multinational with some 30,000 employees in more than 70 countries wanted to investigate potential liabilities related to their employee benefit plans in the event of a terrorist attack. Using a tailor-made questionnaire, local benefit plans, insurance contracts, and the wording of the local employment contracts were assessed.
Benefit plans in most countries were identified, ranging from basic accident coverage to the full range of benefits. In the vast majority of countries, terrorism was excluded from the insurance policies. In several countries, the risk was carried by the local subsidiary as a book-reserve on their balance sheet. Some policies restricted the total amount payable per incident in the event of a catastrophe. The total exposure to the company was more than US$500 ($732) million, with eight locations each representing potential liability in excess of US$10 ($14.6) million.
In order to reduce the exposure, the multinational purchased catastrophe coverage in the local insurance market where this was possible. In the countries where coverage was not available, other solutions are being investigated, such as a global umbrella coverage or reinsurance to the captive.
In addition to reducing the financial exposure, the company is reviewing its emergency plans and its executive travel procedures. A positive side effect of this exercise was that the company obtained detailed information on its global risk benefits. In order to benefit from economies of scale, the company is now also establishing a global pooling program that could save them up to 15 per cent each year on their overall risk benefit costs.
by Ruud Kistemaker, manager international benefits Continental Europe, Aon Consulting
