Looking back on the global political and economic events of thelast decade, the pace of change has heightened tenfold. Now thequestion becomes, what will be the next event of globalproportion?

Today’s risk management professionals need to hedge againstevents such as floods in Australia; earthquakes in New Zealand; the bankruptcy of General Motors,Enron, Lehman Brothers; unpredictable government actions in Mexico,Brazil, and China ... these lists go on and on without limit.

These occurrences perpetuate claims, sometimes of catastrophicnature. While insurance premiums, which are a pure expense, can beviewed as an investment, I recommend that risk managementprofessionals view them as an educated hedge against changes thatat some point in time will adversely affect theirorganizations.

It behooves any organization planning to expand into new,unchartered territories or are already transacting business abroadto seek a tangible safeguard against ongoing cash flow volatility.This safeguard needs to be above and beyond what its riskmitigation professionals are able to control.

In the current global economy, consumer spending andunemployment in the U.S. and many other developed nations haveexhibited signs of improvement in the first half of 2011. Despitequick actions taken by the U.S. government, providing temporarystability to boost the world’s financial house, our sustainabilityis uncertain.

MITIGATING POLITICAL RISK

Given today’s uncertainties, where does that leave thoseemployed to mitigate political and economic risk for companiesconducting or planning to conduct business on a global scale?

Today’s risk managers and financial executives often findthemselves in unfamiliar territory. For example, trying todetermine the best way to protect their production facilities andrelated business activities in Mexico, expanding their footprint inRussia, or perhaps conducting trade with new customers in Chinawithout requiring a letter of credit to be competitive.

Despite the risks of manufacturing, investing, and selling goodsabroad, the appetite for transferring these risks to the insurancesector remains strong for most risks. But do not run to yourinsurance broker asking for coverage for your production facilityin Yemen, because let’s face it, that house is already on fire.

A risk manager, however, could find coverage attractively pricedfor a global risk portfolio for assets in places like Mexico,Brazil, China, Russia, and India among many other emerging marketcountries.

Further, investment and credit insurance premium rates are atdecade lows, due to increased market capacity and recently reducedclaim volumes.

Trade credit insurance protects an organization from cash flowdisruption due to the insolvency or protracted default(non-payment) of a key customer. Coverage includes losses caused bypolitical risk such as currency inconvertibility.

Political risk insurance protects companies as they expandoperations into both developed markets as well as emergingeconomies. It also protects a firm’s assets, contracts, and tradeflow against financial losses caused by a single event or series ofevents that are political in nature.

The key to purchasing global coverage is to do so before youhear the country—where your organization’s key assets arelocated—being discussed in the globalized national news media.