Email
Newsletters
R&I ONE®
(weekly)
The best articles from around the web and R&I, handpicked by R&I editors.
WORKERSCOMP FORUM
(weekly)
Workers' Comp news and insights as well as columns and features from R&I.
RISK SCENARIOS
(monthly)
Update on new scenarios as well as upcoming Risk Scenarios Live! events.

Global Shipping

Full Speed Ahead

A dispute delaying Panama Canal construction was resolved, but further delays could be costly to shippers and exporters.
By: | March 25, 2014 • 3 min read
200247925-001

Any further delays to widen the Panama Canal could have far-reaching cost implications for all parties involved in the construction project and the shipping companies and exporters who use the Canal, a marine risk expert warned.

The Panama Canal Authority (ACP) signed a deal this month to end a four-month dispute — and a two-week work stoppage — over $1.6 billion in cost overruns claimed by the Grupo Unido por el Canal consortium (GUPC) carrying out the work. The dispute had threatened to derail the whole project, which now is expected to cost nearly $7 billion.

Advertisement




Under the terms of the agreement, the Authority and the Spanish-led construction consortium will each invest an extra $100 million in the project.

Zurich North America, which holds $400 million surety bond on the project, “worked diligently with the ACP and GUPC to reach an agreement on the matter and fortunately the two sides have had a successful negotiation,” said Michael Bond, head of surety, Zurich North America. “We congratulate both of them on effectively reaching a favorable outcome. Zurich was glad to have played a role in a solution that brought the project forward.”

When the Canal expansion is completed in December 2015, the new third lock will house 12 giant lock gates designed to allow larger cargo ships through, and double the shipping lane’s capacity.

But Douglas Sakamoto, class underwriter, marine, Liberty Specialty Markets, warned that any further interruptions could result in shipping delays, increased costs and lost shipping tolls.

“The forecast for work to be completed has changed from 2014 to 2015, which is still not a massive delay when compared to the dimension of the work and the expectation in terms of international trade turnaround,” Sakamoto said.

“However, a longer delay could impact several international trade industries since there are lots of related ongoing investments, such as work on several international ports to adapt them to the new vessels, and orders placed for the new-Panamax vessels.

“If the work can’t be completed for any reason and costs still continue increasing, there are a number of serious implications such as the termination of the agreement with the current consortium, and the bond policy may be required in order to provide the extra amount needed to complete the work.”

When done, the Panama Canal Authority is expected to double the $1 billion in revenue it currently receives from shipping tolls.

With more than 13,000 ships passing through the Canal every year, Sakamoto said, construction delays could mean restrictions in the amount of goods producers can export as well as increasing the time it takes to ship the goods.

He noted that producers of commodities, such as LNG, which are exported from the U.S. Gulf Coast to target markets like Asia and the west coast of Latin America could be affected.

In addition, grain producers in the Brazilian ports of Itaqui, Suape and Pecém would also lose out on shorter shipping times, he said.

Shipping companies that have invested heavily in new-Panamax vessels orders several years ago would similarly miss out on vital revenue, Sakamoto said.

Advertisement




International port authorities that have poured vast amounts of money into developing their ports for larger vessels and cargo volumes would also be adversely affected, Sakamoto said.

Pressure to meet the new deadline for completion of 2015, he said, could also impact labor force costs and suppliers.

“The Panama Canal construction project has been highly debated,” said a spokesman for Allianz Global Corporate Specialty, “but it’s actually not unusual for a large construction project to run over/get delayed. In fact, that’s why with project cargo coverage, there is a particular element called ‘delay in start up’ protection to help mitigate that risk.”

Work on the Canal project is now 70 percent complete; however the delay has come at a considerable cost to Sacyr, the Spanish building company that is leading the consortium, which saw its share price drop 6.9 percent this month following a breakdown in initial talks.

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda and news editor at the Insurance Times and Global Reinsurance. You can reach him at riskletters@lrp.com.
Share this article:

Infographic: The Risk List

6 Non-Cyber Risks for Technology Companies

Tech firms face multiple perils in addition to cyber risks.
By: | July 9, 2014 • 2 min read
Topics: June 2014 Issue

RiskList_June
RiskList_JuneRiskList_June

The Risk List is presented by:


RiskList_JuneRiskList_JuneRiskList_June

The R&I Editorial Team may be reached at riskletters@lrp.com.
Share this article:

Sponsored Content by AIG

Global Program Premium Allocation: Why It Matters More Than You Think

Addressing the key challenges of global premium allocation is critical for all parties.
By: | June 2, 2014 • 5 min read

SponsoredContent_AIG
Ten years after starting her medium-sized Greek yogurt manufacturing and distribution business in Chicago, Nancy is looking to open new facilities in Frankfurt, Germany and Seoul, South Korea. She has determined the company needs to have separate insurance policies for each location. Enter “premium allocation,” the process through which insurance premiums, fees and other charges are properly allocated among participants and geographies.

Experts say that the ideal premium allocation strategy is about balance. On one hand, it needs to appropriately reflect the risk being insured. On the other, it must satisfy the client’s objectives, as well as those of regulators, local subsidiaries, insurers and brokers., Ensuring that premium allocation is done appropriately and on a timely basis can make a multinational program run much smoother for everyone.

At first blush, premium allocation for a global insurance program is hardly buzzworthy. But as with our expanding hypothetical company, accurate, equitable premium allocation is a critical starting point. All parties have a vested interest in seeing that the allocation is done correctly and efficiently.

SponsoredContent_AIG“This rather prosaic topic affects everyone … brokers, clients and carriers. Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”

– Marty Scherzer, President of Global Risk Solutions, AIG

Basic goals of key players include:

  • Buyer – corporate office: Wants to ensure that the organization is adequately covered while engineering an optimal financial structure. The optimized structure is dependent on balancing local regulatory, tax and market conditions while providing for the appropriate premium to cover the risk.
  • Buyer – local offices: Needs to have justification that the internal allocations of the premium expense fairly represent the local office’s risk exposure.
  • Broker: The resources that are assigned to manage the program in a local country need to be appropriately compensated. Their compensation is often determined by the premium allocated to their country. A premium allocation that does not effectively correlate to the needs of the local office has the potential to under- or over-compensate these resources.
  • Insurer: Needs to satisfy regulators that oversee the insurer’s local insurance operations that the premiums are fair, reasonable and commensurate with the risks being covered.

According to Marty Scherzer, President of Global Risk Solutions at AIG, as globalization continues to drive U.S. companies of varying sizes to expand their markets beyond domestic borders, premium allocation “needs to be done appropriately and timely; delay or get it wrong and it could prove costly.”

“This rather prosaic topic affects everyone … brokers, clients and carriers,” Scherzer says. “Many risk managers with global experience understand how critical it is to get the premium allocation right. But for those new to foreign markets, they may not understand the intricacies of why it matters.”

SponsoredContent_AIGThere are four critical challenges that need to be balanced if an allocation is to satisfy all parties, he says:

Tax considerations

Across the globe, tax rates for insurance premiums vary widely. While a company will want to structure allocations to attain its financial objectives, the methodology employed needs to be reasonable and appropriate in the eyes of the carrier, broker, insured and regulator. Similarly, and in conjunction with tax and transfer pricing considerations, companies need to make sure that their premiums properly reflect the risk in each country. Even companies with the best intentions to allocate premiums appropriately are facing greater scrutiny. To properly address this issue, Scherzer recommends that companies maintain a well documented and justifiable rationale for their premium allocation in the event of a regulatory inquiry.

Prudent premiums

Insurance regulators worldwide seek to ensure that the carriers in their countries have both the capital and the ability to pay losses. Accordingly, they don’t want a premium being allocated to their country to be too low relative to the corresponding level of risk.

Data accuracy

Without accurate data, premium allocation can be difficult, at best. Choosing to allocate premium based on sales in a given country or in a given time period, for example, can work. But if you don’t have that data for every subsidiary in a given country, the allocation will not be accurate. The key to appropriately allocating premium is to gather the required data well in advance of the program’s inception and scrub it for accuracy.

Critical timing

When creating an optimal multinational insurance program, premium allocation needs to be done quickly, but accurately. Without careful attention and planning, the process can easily become derailed.

Scherzer compares it to getting a little bit off course at the beginning of a long journey. A small deviation at the outset will have a magnified effect later on, landing you even farther away from your intended destination.

Figuring it all out

AIG has created the award-winning Multinational Program Design Tool to help companies decide whether (and where) to place local policies. The tool uses information that covers more than 200 countries, and provides results after answers to a few basic questions.

SponsoredContent_AIG

This interactive tool — iPad and PC-ready — requires just 10-15 minutes to complete in one of four languages (English, Spanish, Chinese and Japanese). The tool evaluates user feedback on exposures, geographies, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors and trends to produce a detailed report that can be used in the next level of discussion with brokers and AIG on a global insurance strategy, including premium allocation.

“The hope is that decision-makers partner with their broker and carrier to get premium allocation done early, accurately and right the first time,” Scherzer says.

For more information about AIG and its award-winning application, visit aig.com/multinational.

This article was produced by AIG and not the Risk & Insurance® editorial team.
SponsoredContent_AIG


AIG is a leading international insurance organization serving customers in more than 130 countries.
Share this article: