Looking back on the global political and economic events of the last decade, the pace of change has increased tenfold. Now the question becomes, what will be the next event of global proportion?
Today’s risk-management professionals need to hedge against events 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 catastrophic nature. While insurance premiums, which are a pure expense, can be viewed as an investment, I recommend that risk-management professionals view them as an educated hedge against changes that at some point in time will adversely affect their organizations.
It behooves any organization planning to expand into new, unchartered territories or that is already transacting business abroad to seek a tangible safeguard against ongoing cash-flow volatility. This safeguard needs to be above and beyond what its risk-mitigation professionals are able to control.
In the current global economy, consumer spending and unemployment in the U.S. and many other developed nations have exhibited signs of improvement in the first half of 2011. But despite quick actions taken by the U.S. government, providing temporary stability to boost the world’s financial house, our recovery remains uncertain.
MITIGATING POLITICAL RISK
Given today’s uncertainties, where does that leave those employed to mitigate political and economic risk for companies conducting or planning to conduct business on a global scale?
Today’s risk managers and financial executives often find themselves in unfamiliar territory—for example, expanding their footprint in Russia, or perhaps conducting trade with new customers in China without requiring a letter of credit (to be competitive).
Despite the risks of manufacturing, investing and selling goods abroad, the appetite for covering these risks remains strong among most carriers. But do not run to your insurance broker asking for coverage for your production facility in Yemen, because let’s face it, that house is already on fire.
A risk manager, however, could find coverage attractively priced for a global risk portfolio for assets in places like Mexico, Brazil, China, Russia and India, among many other emerging-market countries.
Further, investment and credit-insurance premium rates are at decade lows, due to increased market capacity and recently reduced claim volumes.
Trade credit insurance protects an organization from cash-flow disruption due to the insolvency or protracted default (nonpayment) of a key customer. Coverage includes losses caused by political risk such as currency inconvertibility.
Political-risk insurance protects companies as they expand operations into both developed markets as well as emerging economies. It also protects a firm’s assets, contracts and trade flow against financial losses caused by a single event or series of events that are political in nature.
The key to purchasing global coverage is to do so before you hear the country—where your organization’s key assets are located—being discussed in the globalized national news media.