Although Latin America is not the largest regional trading partner with the United States, it is the fastest growing one, providing a rich source of raw materials and featuring a burgeoning middle class that offers expanded opportunities to sell U.S. products and services.

While some Latin American countries are experiencing historical growth in their gross domestic product, this is coupled with associated political/regulatory, economic and operational risks. These exposures vary by country and sector and can impact your firm's profit and loss statement as well as the balance sheet.

For those risk managers whose firms are doing business in Latin America, the following are three of the key scenarios that will not only address the related exposures and perils but also discuss available risk-transfer mechanisms.

o Scenario #1: The Supply Chain

The opportunity to import iron ore, agricultural products and oil, among other products, remain strong in Latin America.

Exposures: Aon recommends looking at actual supply-chain exposures before measuring country risk. Once the exposures are identified, it is necessary to begin measuring the impact of political events on the supply chain.

For example, is the production in Latin America time-sensitive (for instance, the clothing business)? If the goods do not arrive at a certain time, will revenues be reduced or will the company incur extra expenses to keep clients happy?

Additional exposures include reliance on standardized or tailored inputs, a single or limited source, and finally on a single geography.

Risks that can affect the supply chain and a company's P&L include loss of profit and extra expense incurred due to trade disruption. The types of risks/perils that can lead to supply disruption include embargo, import or export license cancellation, third-party blockade, government interference with a supplier, forced abandonment of a country/region, and war or civil war.

The risks also include politically motivated riots, strikes, sabotage and terrorism. In addition, there are so-called “acts of God” that can be covered, such as windstorm, fire, explosion, flood or earthquake.

For example, a full-scale conflict between Venezuela and Colombia could disrupt production in the region. An earthquake may affect production of goods that are limited to certain seasons. A political measure affecting agricultural exports of Argentina may impact the export of certain goods that are unique to that country or region.

While others may be able to produce the same goods, they may be overwhelmed with demand, which further slows down the supply.

Latin American countries–such as Argentina, Brazil, Costa Rica, Honduras and Venezuela–have unique trade relations with the United States, presenting a unique set of exposures.

Risk Transfer: A highly tailored trade disruption insurance policy addresses lost revenues, unexpected or unbudgeted expenses, or contractual penalties. The policy pays a claim after a waiting period, following the non-arrival of goods, rerouting of shipments/deliveries, disruption of transportation logistics, political risks and more.

Following property damage, the policy can also cover perils not addressed under a contingent business interruption policy.

o Scenario #2: Nonpayment By Private And Government Customers

Various economies in Latin America are projected to grow in 2010. Brazil, for example, is expected by leading forecasters to boost its GDP by 4.7 percent this year from 0.4 percent in 2009.

Exposures: Insolvency and slow payments by both private and state-owned companies can affect a firm's balance sheet. Indeed, a number of insolvencies have occurred in the Latin American region that have caused nonhonoring or the nonpayment on contracts for goods and services exported to the region. Trade credit insurers are therefore behaving cautiously in certain countries.

Risk Transfer: A trade credit insurance policy could address a company's exposure to nonpayment of receivables from private and government buyers. Trade credit insurance comes in various forms, including high deductible or excess, whole turnover and single-debtor policies.

o Scenario #3: Threats To Foreign Direct Investments

Expropriation and related actions can also affect a company's balance sheet. The upcoming Olympics and infrastructure projects related to that mega-event–as well as Brazil's deepwater oil discovery–present a myriad of opportunities as well as risks.

Latin American countries continue to be a growth opportunity for pension funds. Honduras is a haven for garment manufacturing. Venezuela is an exporter of crude oil. Most of Latin America is building new roads, airports, commercial office space and water treatment facilities, attracting U.S. construction and engineering companies.

Exposures: Government and Central Bank interference with foreign investment and the supply of hard currency. For example:

o Constitutional changes affecting how foreign investors' profit/revenue is treated in the host country.

o Arbitrary changes in contracts during tough economic times.

o Local civil unrest may cause significant property damage.

o Physical damage due to rebellion occurs with increasing disparity between rich and poor.

o The local population feels that its only outlet for frustration is to destroy foreign investors' assets.

o The host country has an economic crisis that shrinks its hard currency reserves, and local banks are not able to convert local currency into U.S. dollars.

o The Central Bank restricts the transfer of dollars out of the country.

o A foreign investor is unable to repay debt from a host country or repatriate profit/dividends.

o A host country declares a moratorium on debt.

o A government and/or other state entity takes a quasi-commercial action, and investors suffer a partial loss due to a contractual breach.

Risk Transfer: Coverage can be arranged to insure against losses due to confiscation, expropriation, nationalization and deprivation, as well as license cancellation, embargos, physical damage due to political violence, and currency inconvertibility/exchange.

Corina Muller Monaghan is vice president of political risk for Aon Risk Services.

Special Reports /

Latin American Opportunities Booming, But Risk Managers Face New Exposures

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