This is according to Aon Global UK’s technical director Richard Mortlock who warned that placing too much emphasis on the broad coverage in the master policy could be detrimental by leading to less compliant policies and overall higher tax burdens.

Risk managers need to consider building programs upwards from local policies, reversing the current market model of beginning with the master layer. In other words, the local policy must be designed to pay the claim, rather than putting heavy reliance on the master policy.

Aon presented the possible worst case scenario: A factory burns down as a result of a nearby earthquake. The local policy has minimal coverage and excludes high level catastrophe related claims. The company looks to the master policy but different interpretation of wordings between local policy and master policy mean the excess master claim may not be paid. Added to this, if the event has happened in a country with a protectionist approach, regulators may impose penalties for having a non-admitted insurance or there may even be problems of the flow of capital into the country to help rebuild the factory.