How Insurers Can Mitigate Third-Party Jurisdictional Risk

Third-party vendors are vital to many insurance operations. However, engaging with third parties located across jurisdictions presents significant risk. Jurisdictional risk is the legal and regulatory challenges that may arise due to differences in international laws, regulations, and enforcement across multiple geographies or legal systems. 

To effectively manage this risk, insurance companies must adopt proactive third-party risk management measures to ensure compliance and protect data.

Understanding Third-Party Jurisdictional Risk for Insurance Companies 

Insurance companies need to consider several important aspects related to jurisdictional risk. One major concern is the different regulations that dictate where data can be stored and processed, known as data residency. These regulations mainly aim to protect personal information. The transfer of data across borders is governed by regulations that determine the lawful movement of data between jurisdictions. Regulations on private data collection, use, and disclosure vary from one country to another, even from state to state.
 
Furthermore, the enforcement of laws can have effects beyond national borders, which is known as extraterritorial application of laws. This can have serious consequences for insurers who unintentionally violate laws, even if they’re located outside the jurisdiction in question. Regulatory authorities can conduct investigations and impose significant fines, adding risks. Lastly, international sanctions and embargoes restrict business transactions.
 
So, no matter where the insurance company is located, jurisdictional risk should be top of mind when working with external third parties.

Best Practices for Managing Third-Party Jurisdictional Risk

It may seem overwhelming to track third parties across multiple jurisdictions. There are several key third-party risk management best practices to help manage jurisdiction risk. 

By implementing the following best practices, insurance companies can better manage third-party risks:

• Centralize third-party information. Establish a centralized inventory for third-party information. It should include details on third-party locations, data residency compliance, and privacy policies. This should be easily accessible to ensure quick retrieval of the necessary information for compliance assessments and audits.
• Manage contracts and documents. Set procedures for managing third-party contracts, data processing agreements, and other legal documents. Implement standardized document storage, version control, and digital signature processes to ensure proper maintenance and accessibility of legal documentation.
• Perform risk assessments and due diligence. Develop comprehensive risk assessment and due diligence processes to evaluate third-party compliance with jurisdictional requirements. Standardized templates and customizable questionnaires can assess third parties effectively.
  Consider integrating external data sources to gather additional information on the third party’s financial stability, legal history, and reputation. Remember that this isn’t only performed once in the third-party relationship. Regulations and compliance change over time, so it’s important to regularly re-assess risk and refresh due diligence documentation. 
• Collect reporting and analytics. Reporting mechanisms should assess and analyze third-party compliance with jurisdictional requirements regularly. Develop internal reporting templates and tools to streamline the reporting process. Available data sources and analytics help you gain insights into third-party performance and identify potential risks or issues. Be sure to document any issues as they arise and track them through to completion. 

Managing third-party jurisdictional risk is crucial for insurance companies. Robust third-party risk management practices can help insurers minimize the potential legal, regulatory, and reputational consequences of jurisdictional risk. Third-party risk management tools like risk assessments, comprehensive due diligence, and well-written contracts are essential. Regular third-party monitoring and auditing ensures third parties follow data residency, privacy, and protection regulations. 

By leveraging third-party risk management practices and controls, insurers can maintain regulatory compliance, protect customer data, and ensure secure operations across jurisdictions, fostering trust in their organization and confidence in the industry.