Insurance is a critical tool for managing risk—when it works.Let the insurance buyer beware, however, that it doesn't alwayswork equally well everywhere. Coverage problems regularly surprisemultinational companies that require property insurance in remotelocales around the world. Cynics have compared global propertyinsurance to cell phone service: Depending on where you are, yourexperience may vary. By a lot.

Worse, bad choices in global insurance coverage may remainhidden until a remote location suffers a fire, flood, hurricane,earthquake, cyberattack, or other catastrophe. Only in such acrisis scenario does the company discover how many strings areattached to the insurer's promise to pay. The insured business mayunexpectedly face not only coverage gaps, but also unanticipatedtaxes, regulatory scrutiny, delays in claims payments—and,ultimately, extended business interruptions.

These problems can often stem from a conventional globalinsurance structure called the "controlled master program," underwhich a corporate insurance client signs a master contract with aninsurer and the insurer arranges coverage for the company in eachcountry where the company operates. Coverage under such a contractmay vary from country to country. The result may be a mishmash ofconditions and limits in coverage across the company's differentlocations—and, potentially, nasty surprises if the company suffersa loss in a remote country.

Time after time, multinationalshave found that their local policy for an overseas operation failsto cover their entire loss in a disaster. It's possible that theprimary insurer, which oversees the controlled master program, mayactivate the master policy to cover the gaps in limits andconditions. Assuming that happens, what's the problem?

Well, consider the following scenario: An American company has aplant in Southeast Asia that burns down, incurring a US$150 millionloss. The company's local policy in Asia covers only US$100million, because when the policy was purchased, the local insurerhad insufficient capacity to cover the full value of the plant. Inother words, the local insurer didn't have enough capital to insurethe plant for US$150 million. The company's primary insurer maythen agree that its master policy should cover the balance.However, settling that claim would require a US$50 million cashtransfer from the insurance company's U.S. headquarters to theinsured's affected overseas operation.

Here are some problems that such a cross-border transfer couldcreate:

• Unexpectedtaxation. Cross-border transfers might besubject to taxes levied in the receiving jurisdiction since thetransfers might be considered unearned income. By contrast, theportion of the claim settled locally—US$100 million in this case—islegally considered to be an insurance payment, so it doesn't gettaxed. A local policy with broader coverage and higher limits wouldhave been a better idea, because in the event of a US $150 millionloss, the entire US$150 million settlement would be tax-exempt.

• Regulatory scrutiny. Majorcross-border funds transfers are likely to catch the attention ofregulators, who may be concerned about foreign exchange advantagesaccruing to one party or the other, and about having theirjurisdiction flooded with foreign currency. This scrutiny couldcomplicate the transaction.

• Delays. There are twotypes of delays that a multinational might face in receivinginsurance payouts abroad. The first is the normal red tape thatarises as the primary and local insurers determine who will coverwhich portion of a claim, and at what amount—decisions that areoften disputed and take time to resolve.

The second type is a third-party delay, such as the cap that areceiving country's central bank may enforce on large cross-bordertransfers. If the receiving country's central bank imposes atransfer cap of US$5 million per month, for example, a US$50million cross-border settlement will take the primary insurer 10months to execute, assuming the insurer doesn't need to transferany other funds from the U.S. to the same country during that time.Thus, the affected operation may lay idle for nearly a year, whichcould cause massive disruptions in the company's order-to-cashcycle in the region and might permanently reduce its marketshare.

'Pay Me Here, Now, and Completely'

These expensive and time-consuming hassles are just a few of thepotential problems that a multinational company may face aftersuffering an insured loss overseas.

The best case in such a scenario would be for the insurer to payclaims fully, immediately, and at the local level. However, payingfully for a major loss requires the local insurer to bewell-capitalized—that is, to have enough cash on hand to cover bigpotential losses. In our example of a manufacturing-facility firein Southeast Asia, the local insurer did not have sufficientcapacity to pay in full.

Another potential cause of a coverage shortfall is for theinsurer to inadvertently underinsure the company's remoteoperations. For example, a factory that would take US$4 million torebuild if destroyed by an earthquake may actually be worth US$20million to its parent company because of the pivotal role it playsin the parent's supply chain. It would be prudent for the parentcompany to insure the factory for US$20 million, to cover the fullextent of losses should a disaster take the factory offline for anextended period of time.

Occasionally, a local policy may have a gap in coverage thatleaves entire events uncovered. Some countries' insuranceregulators limit property insurance to a list of specific events,such as: fire, lightning strike, explosion, and aerial impact. Inthe event of an earthquake, a foreign company would have to rely onits master policy to pay for the entire loss, with all theattendant delays and tax penalties. What's challenging for themultinationals buying insurance abroad is that theseproblems—coverage gaps, red tape, disputes, delays, and taxburdens—typically do not become apparent until long after theinsurance contract is signed.

Reverse-Engineer the Process

How can a multinational CFO or treasurer ensure that any locallosses will be paid fully, locally, and immediately, and that thetransfers will be classified as insurance payments and not unearnedincome? By scrutinizing every local policy that the companypurchases and reverse-engineering a hypothetical claim.

Here are seven steps treasury and finance teams can take alongthe way to better understand coverage in each country where theircompany does business, and to help avert problems with claims.

1. Identify your company's criticaloperations. Conduct a business impact analysis withkey managers—and suppliers, if appropriate—and look at all yourproperties collectively. Determine which are the most critical toyour business continuity, production, and profit.

2. Sort properties by vulnerability.Review the resulting list of critical operations, and identify theproperties that are most vulnerable to a catastrophe, such as fire,flood, wind, earthquake, cyberattack, or failure of largeindustrial equipment.

Examine the worst-case scenarios. Engineers, insurers, andfacilities and risk management teams should assess fire and naturalhazard protection with both eyes-on inspections and the help offlood, wind, and earthquake maps. Data is also available on thefailure histories of every major model of industrial equipment, andyour risk manager can look at each machine's age, operatinghistory, safety conditions, and operator training.

Next, look beyond the brick and mortar to the total financialloss your business could incur. In addition to the costs ofrebuilding and potential lost sales, which are typically covered byinsurance, a disaster abroad could create instability in the supplychain. Your organization could also lose market share and growthopportunities, or it could suffer from negative investor sentiment,leading to a rising cost of capital.

Finally, take a broader view of the business risk inherent inthe countries where your properties are located. Governments,non-governmental organizations (NGOs), and some private companiesrate geographies on risk/resilience factors such as naturalhazards, fire risk management capabilities, building code quality,building code enforcement, infrastructure quality, economicstrength, cyber risk, corruption, supply chain visibility, oildependence, corporate governance, and more. (FM Global aggregates12 risk/resilience drivers for 130 countries and territorieshere.)

In short, understand the full extent of your risk.

3. Shore up as many vulnerabilities as youcan. When you fully understand your vulnerabilitiesand the true role of each property in your global businessperformance, prioritize your investment in risk mitigationaccording to the likelihood and severity of potential losses.

On a property-by-property level, that can mean securing roofs,installing automatic fire sprinklers, investing in flood barriers,and patching software. Pay special attention to digital threats.Sweep offices for physical cyber vulnerabilities (e.g., unlockeddoors and unattended laptops) and address shortcomings in yourinformation governance, IT security, insider threat management,disaster recovery, and networked industrial controls.

4. Scrutinize coverage options. Ineach country and for each prospective insurer, go over coveragedetails. Make sure you understand all exclusions, includingexcluded disruption types and causes, duration limits, dollarlimits, etc.

Warning: It's common for local insurance carriers to overlookthreats that have not yet significantly affected their geographies,even if those threats could have a future impact. For example, if asmall country hasn't experienced any terrorism, it may exclude thisthreat from standard insurance policies.

Another painful and common exclusion is what we call "firefollowing." Let's say a cyberattack causes a turbine to speed upand break, and that triggers a fire. Some policies will cover thecyberattack and equipment failure but not the fire following it.The fire can be more expensive than the triggering event, so it'sbest to know whether this type of event is covered. The goal is tolearn exactly what you're buying.

5. Resist the controlled masterpolicy, if possible. If youcan find it, choose a standard high-capacity underlying policythat's replicated verbatim in every country where you needcoverage. Ask each local insurer to prove that it has enoughcapital to pay any foreseeable claim, and pay it—locally—to avoidunnecessary taxes and delays.

6. Evaluate the capacity of your primaryinsurer. As part of your due diligence on yourprimary global insurer, challenge the provider to show it hasenough capacity (often through reinsurance). Start by confirmingthe provider's ratings from A.M. Best, Fitch, Moody's, and S&P.Understand that capacity is largely a function of reinsurancetreaties. Most prominent companies will have best-in-class treatieswith the world's major reinsurers.

Proof that the insurer has adequate capacity doesn't mean yourmain corporate carrier will stand behind local policies in everycountry, however, nor that every local insurer will be able to paya claim. Confirm in writing that your carrier guarantees thefinancial security of its entire worldwide network of insurancepartners. Locally affiliated partners should provide the sameservice as if they were licensed by the primary insurancecarrier.

7. Then, and only then, sign the insurancecontract. These due-diligence steps aretime-consuming, and corporate CFOs and treasurers may be tempted toeconomize. However, taking shortcuts in shopping for globalinsurance might jeopardize your resilience.

Many insurers can't satisfy all the requirements for robustglobal coverage—which involve extensive engineering expertise,analytical capabilities, commitment, time, money, and acceptance ofrisk. Moreover, some insurers simply value loss prevention morethan others.

Full-service global loss prevention goes beyond buying capacityin the local market, engineering a risk, or paying a claim. It'sputting clients in a position where they actuallyunderstand their risk. It's helping them to be confidentthat their risk is managed on a global scale. This confidence is alot different from merely buying insurance coverage for anundetermined event.

Multinational insurance is complex, but corporate insurancebuyers can take steps to make the process work in their favor.Corporate treasury and finance executives need to beware of thepitfalls of global property insurance, understand what they arebuying, and take their due diligence very seriously. Then they canbe confident that when they do suffer a loss, their insurance willperform as expected.

Denise Hebert isvice president and treasurer at FM Global, one of the world'slargest commercial property insurers.