Britain's imminent departure from the European Union is forcing many organisations to rethink their global strategy, and in particular to bolster their non-EU trading partners. With many economies underperforming globally, including China and much of Europe, a growing number of organisations are looking to boost their presence in the US - one of the few major economies performing well.
The US is already one of the UK's largest trading partners and with a shared language and similar culture, many companies assume that processes and operations can seamlessly be transferred to the US.
However, this maynot always be so. Graham Taylor, vice president, business insurance, at Travelers in Europe, warns that sometimes boards underestimate the risks involved: "When trading in the US, you will have many different exposures than you'd have if you were trading in the UK, and that's especially the case in terms of insurance. If you don't know what you're dealing with, you can get seriously caught out"
He adds that many UK organisations may be "blissfully ignorant" of important differences between the two countries. "It is really important to be aware that although the US looks and feels similar, it actually has some real structural and intrinsic differences that could cause a lot of financial pain."
Boardrooms typically do not take insurance considerations into account in the planning phase of expansion. "Insurance is often the last thing they look at," Mr Taylor says. "If you don't want to put the company in peril, you need to include risk and insurance cover as part of the decision process."
One of the challenges is understanding the structural differences between the two countries. "Each of the 50 states in America is its own legal entity from an insurance standpoint," he explains. Understanding the nuances of each state - often down to a county level - is a "complex undertaking".
In some states, for example, insurance wording has to contain specific phraseology in order to be valid, whereas similar but not identical language may be necessary in another state. A third state may not even prescribe particular wording on that particular topic.
Insurance policies are also structured differently. Mr Taylor explains that although wordings may be similar in their focus, the pay-outs can be significantly different. For example, in the US, employee injuries are covered by Workers' Compensation, whereas in the UK, the cover is through Employers' Liability. The manner of pay-outs is different, with the former operating on a pre-agreed cost basis and being more prescriptive than in the UK.
Business interruption is also structured differently, he explains. UK gross profit business interruption cover is designed to put the customer back in the same financial position they were in before the event that disrupted their business. The insurance covers the loss of profits and lasts for a pre-agreed period which allows companies time to get back on their feet. US business interruption cover, on the other hand, only covers loss of income until the repairs should reasonably have been completed.
The legal culture in the US is also something to be mindful of. According to Mr Taylor, while class actions are "quite rare" in the UK, the US has a costly pay-out culture. The legal system may sometimes seem to be weighted in favour of the claimant and, coupled with higher medical costs, companies need to be far more cognisant of what they might be liable for. "If you get something wrong and that causes multiple injuries, you can find yourself very exposed," he warns.
Environmental difference should also be factored in, Mr Taylor advises. Significant natural catastrophe events are rare in the UK but hurricanes, severe flooding and earthquake are far more prevalent, especially in certain US states. "
Overall, larger pay-outs, a higher cost of doing business for insurance companies, and significantly bigger natural catastrophe liabilities means business premiums are generally much higher - sometimes by a magnitude of five, he says.
Mr Taylor stresses that none of the challenges are insurmountable, but organisations need to understand the risks they are facing. "Insurance cover should enable you to fulfil your ambitions and make the most of opportunities - not prevent you from doing so."
He stresses the importance of partnering with brokers and insurers who understand the US market inside and out. "This should include things like having claims people on the ground - preferably in every state where you operate - so that any claims will be dealt with by knowledgeable people who understand the environment."
Ultimately, although insurance may be last on the list of considerations for boardrooms hoping to increase their US exposure, this risks undermining the whole strategy:
"Trading in the US requires a lot of investment of time and money initially. The rewards can be significant, but if you don't want to put the company and its balance sheet in peril and have that investment wiped out, then you need to include the risks around insurance cover."
For more information, read Travelers' 'top 10' tips in their whitepaper on US exposures.
Graham Taylor - vice president, business insurance,Travelers in Europe