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How Insurers Can Mitigate Third-Party Jurisdictional Risk

5 min read
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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.

Mitigating Third-Party Jurisdictional Risk for Insurance Companies

Insurance companies must focus on managing jurisdictional risks to ensure data safety and regulatory conformity. By using the strategies below, insurance companies can successfully manage the complexities of different jurisdictions, protect the data of their policyholders, and uphold regulatory compliance. 

The mitigation strategies include:

  1. Comprehensive due diligence – To mitigate jurisdictional risk, insurers must conduct thorough due diligence on third-party vendors. This includes evaluating the vendor's location, assessing the applicable laws and regulations, and understanding implications on data management and privacy. A comprehensive due diligence process should examine the third party’s: 
    • Compliance program
    • Data security measures
    • Contractual commitments
    • Ability to adapt to evolving regulatory landscapes
  2. Robust third-party contracts and agreements – Clear and well-drafted third-party contracts are essential to managing jurisdictional risk. Contracts should address compliance with applicable laws and regulations, data protection requirements, and the handling of cross-border data transfers. Here are some suggested clauses to include:
  3. Data residency and cross-border data transfers  Insurance companies need to assess data residency requirements in jurisdictions they operate in. Compliance with these requirements may involve data localization, where data must be stored and processed within specific jurisdictions. Implementing safeguards, such as binding corporate rules or contractual clauses, can facilitate lawful cross-border data transfers. Insurers can minimize the risk of non-compliance and data breaches by understanding data residency obligations and implementing appropriate measures.
  4. Compliance with privacy and data protection regulationsPrivacy and data protection regulations, such as the GDPR, HIPAA, and various state privacy laws, require insurers to handle personal data responsibly. Insurers should verify third-party compliance with these regulations. Third parties should have robust data protection policies, procedures for managing data subject rights, and mechanisms for reporting and investigating data breaches. Insurers should also consider contractual provisions that mandate compliance with specific privacy regulations, ensuring the protection of policyholders' personal information.
  5. Third-party monitoring and auditing  To effectively manage jurisdictional risk, insurers must establish monitoring and auditing processes. Regular assessments should be conducted to verify compliance with applicable laws and regulations. Insurers can conduct on-site audits, request independent third-party audits, or leverage certifications, like ISO 27001, for information security management systems. These measures provide assurance that third parties adhere to necessary standards and mitigate the risk of regulatory non-compliance.

how insurer mitigate third party jurisdictional risk

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.

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