Political, Economic Risk
Mitigation Key For Global Markets
BY DAMION WALKER
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-insur-ance 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. NU
Damion Walker is
senior vice president
of Willis Ltd., in California.
He may be reached at
ERM Execution Varies By Organization, Risk Managers Report
BY CAROLINE MCDONALD
TWO CORPORATE risk managers re- ported very different results with enter- prise risk management (ERM) progress
at their companies during a recent webinar.
The webinar, “RIMS Benchmark Book/The
Live Event,” was presented by Advisen and included live commentary from industry leaders.
“The actual process of ERM is nonexistent
at Global Crossing,” says Len Resto, director
of risk management for the company. “That
has been despite my trying to get it to grow
in that direction, but it’s been a tough sell.”
He continues that while his immediate
boss is sold on ERM, “the higher up you go,
there seems to be less inclination to do it.”
Looking at the same risks year after year,
Resto says, produces many of the same risk
factors. “So it’s been a tough sell, and now
that Global Crossing has been acquired by
another company [Level 3 Communications],
the ERM effort is dead for the moment. But
we’re hoping the new company picks it up.”
Rich Sarnie, vice president of risk man-
agement for the Great Atlantic & Pacific Tea
Co., says he has better news, noting that
within the past six months, his company
“has totally embraced ERM.”
Sarnie adds that ERM is “really not that
complex” and that his goal in leading the
company’s ERM program is to keep it simple.