Insuring FDI’s success

Foreign direct investment (FDI) has a positive part to play in sustainable economic development and growth, and the efficient allocation of global capital is now widely acknowledged. Unlike portfolio investments, which can expose receiver countries to considerable volatility, FDI is a generally steadfast source of capital that supports macroeconomic stability and allows emerging economies in particular to quickly ramp up their capital stock and knowledge economy.

Global insurers have a part to play in this process as they can underpin FDI by supporting risk management and by providing homogenous protection across countries. Yet their role is too often complicated by protectionist regulations and a fragmented insurance market.

“If I’m putting capital investment into a country, I’d want to know that I can protect my investment, shareholders and employees,” says Andrew Gitsham, Head of International Product Underwriting at Zurich Insurance Group. “I’d want to know that I can mirror my company’s coverage in the same way that I mirror it in my home market. I’d want to know I can create a captive.” Captive insurance companies provide insurance to their parent companies, giving large corporations a way to insure themselves.

The role of insurance in supporting trade is widely understood, but there is far less awareness of insurance’s role in FDI by multinational companies. Insurers help these businesses manage risks associated with cross-border investment and provide cover for some of these risks. Global insurers underpin FDI, and with it economic development and growth, through services that range from expert risk assessment and thorough risk coverage to holistic risk management in the form of international insurance programs and captives. This function could be significantly strengthened via improved insurance regulation.

At present, such regulation is fragmented, resulting in legal and regulatory uncertainties about risk and claims management. The costs of managing FDI-associated risks rise in turn. Also muddying the waters in many countries is regulation favoring domestic carriers and domestic (retail) insurance customers, which hinders international competition among insurers, international risk pooling and the provision of a homogenous and understandable insurance coverage worldwide—and FDI.

“In these places, the result isn’t just more costly insurance solutions. The broader economic benefits associated with FDI are reduced, too, with slower and less resilient economic growth and increased risk for financial instability,” says Thomas Hüerlimann, CEO, Global Corporate, Zurich Insurance Group.

There is a clear opportunity to strengthen the value insurance can provide through global solutions in support of FDI, and doing so would boost economic growth potential while concurrently maintaining local supervisors’ control of their own insurance markets. In an ideal world, at a minimum, non-admitted DIC (Difference in Conditions)/DIL (Difference in Limits) would be allowed. This would help countries support FDI while still preserving regulatory control over domestic markets—a win-win. Two other recommendations whose time has come: Allowing claims handling and risk engineering by foreign insurers; and, locally paid tax, as if there were local policies.

FDI is a cornerstone of global economic growth, and with a bit of cooperation, global insurers such as Zurich could apply their expertise to help maximize the benefits of foreign investment.

Disclaimer: Views expressed on this page and in the reports are not necessarily those of the Zurich Insurance Group, which accepts no responsibility for them.