In times of globalization, many companies are looking for new markets and cheaper production sites abroad and becoming more and more international. As a consequence, this development has led to the establishment of subsidiaries, sales offices and production facilities all over the world. The following post explains the challenges of multinational corporations (MNCs) in times of globalization regarding the implementation of credit insurance within a worldwide organization:
Forces for Global Integration:
In a global environment, MNCs face great pressure to globally integrate and reduce costs. With the aim of handling this immense challenge, MNCs have to achieve efficiency within their global organization in order to decrease their costs in the value creation process. By pooling their purchasing power in the negotiating phase and purchasing credit insurance coverage from one credit insurer for the entire group, MNCs can achieve significant economy of scale effects. On the one hand, premium costs can be monumentally decreased. On the other hand, MNCs can decrease their internal administration costs substantially, as through central negotiating and placement procedures local subsidiaries do not have to spend lots of time and human resources in multiple local credit insurance purchasing processes. E.g., centrally negotiated credit insurance policy articulations can be agreed upon by the legal department on a headquarter basis, and hence do not have to be analyzed on local levels again. In addition, the central coordination of credit insurance enables MNCs to implement group credit insurance standards, with the intention of safeguarding high levels of credit risk protection and reflecting the requirements of a group risk strategy. Furthermore, within the calculation practice of credit insurance premium rates, credit insurers are taking the claims history of the individual entities into consideration. If MNCs pool their purchasing power, local units with a high claims history can be subsidized by units with a low claims history and the total credit insurance costs for the entire group can be impacted positively, as the group’s claims history might be much for favorable than in the individual perspective. This opportunity for cross-border subsidizing can be seen as a global chess game, which enables MNCs to compete much more effectively in a global environment. Thereby, positive cash flows in dedicated countries can be used to fund the development of weaker subsidiaries in other nations.
Forces for Local Responsiveness:
The forces for local responsiveness occur when MNCs are not able to fulfill the full advantages of global economies of scales, as it might not be feasible to provide a global market with standardized products, implement unique processes worldwide or establish central purchasing and distribution centers. Above and beyond the importance of global integration in the implementation process of a credit insurance program for MNCs, there is also the need for local responsiveness in the handling of credit insurance, as this special kind of insurance entails much more day-to-day contact between the insured company and the credit insurer regarding credit limits and potential settlements of claims. The exchange of knowledge on local levels is necessary to ensure that credit limits, in particular, are applied and evaluated efficiently. Credit insured companies can receive higher credit limits if they have direct communication lines with the local credit insurers, through which to discuss the creditworthiness of their insured costumers. In addition, over the last few years the leading global credit insurers have shifted credit risk underwriting responsibilities to their local subsidiaries, with the aim of making decisions about the credit limits of risks in the countries where the risks are domiciled. Furthermore, credit insurance programs for MNCs need to fulfill local legal requirements, as many countries do not allow foreign insurance groups to issue insurance policies to local companies if they do not have a local license in place. In order to understand the different legal requirements, it is necessary to distinguish between admitted, non-admitted and non-admitted prohibited countries. In admitted countries, a locally approved insurer provides coverage to local companies. Within the EU, this is possible across borders without local registration, due to the freedom of service. In non-admitted countries, a local non-registered (= non-admitted) insurance company is also allowed to issue insurance policies to local companies. Finally, non-admitted prohibited countries forbid cross-border insurance coverage without local registration of the insurer. This means that a foreign insurance company is not allowed to issue an insurance policy from abroad in favor of a company domiciled in these specific countries. If they do so, the insurer violates the law. The emergence of legal barriers to the implementation process of credit insurance in certain countries reflects the force of local differentiation arising from trade barriers and policy restrictions implemented by national governments. Therefore, the development of a cost-effective and efficient credit insurance program for MNCs, involves a particular understanding of the changing legal environment. Today, many MNCs are not aware of the fact that their credit insurance program might transgress local jurisdictions, if they buy credit insurance coverage for their local subsidiaries centrally even though the chosen insurer or broker might not be registered in all the necessary countries. Hence, repercussions might follow regarding tax, reputation and a range of other financial issues.
Need for leverage learning on a worldwide basis:
Besides the forces for global integration and local differentiation, there is a third major challenge for MNCs brought on by globalization. As many MNCs have achieved equivalence in their market position and operational scale, it becomes more and more important to leverage and accumulate knowledge arising from their worldwide organization. By this means, victory most often goes to the company that can most effectively harness its access to worldwide information and expertise to develop and diffuse innovation products and processes on a worldwide basis. With regard to credit insurance for MNCs, the access to worldwide information is becoming more and more important. The following arguments highlight the growing significance of leveraging knowledge gathered from all credit insurance policies in a MNC. First, MNCs need to be able to identify group buyer risks and key exposures, as well as the degree of cover protection within their entire worldwide customer portfolio. Second, publicly listed companies are mandated to share information regarding all potential risks with their shareholders. Herewith, aggregated information about credit risks at the group level and potential losses within the entire group are absolutely necessary.
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