With rapid developments in Latin America’s economy and increasing exposure to global markets, risk managers in the region are faced with a barrage of new exposures
With many Latam companies experiencing rapid growth trajectories, some are finding expansion can often equal new risk exposures. Some of these fresh exposures are Latam-specific, but many are commonplace in multinational organisations. Consequently, insurance requirements are not only changing but are greater than ever.
According to Stephen Ixer, associate at law firm Edwards Wildman Palmer, keeping the economies of Latin America growing at a time when Western banks are still consolidating their balance sheets means capital often seems scarcer than ever.
“In insurance, that translates into considerable demand for bond and surety insurance and reinsurance, which is one of the bigger growth areas at present,” he says.
“Also, as the region becomes ever more integrated into the global economy and international supply chains, there is greater take up of business interruption cover and third party liability by local companies.”
According to Ixer, in terms of new insurance solutions, companies are looking for insurance cover that is specialised to their needs and, as a result, “insurers are offering more individualised policies in order to maintain and grow their market shares”.
“Political risk insurance is always important for foreign companies looking to launch into Latin America; many also take out kidnap and ransom (K&R) for their senior employees,” he says.
And as Latin America’s economy continues to grow, so too does the demand for specialty lines insurance in the region.
Of those lines, Thais Kirschner, vicepresident of operations for Liberty International Underwriters (LIU) Latin America, expects to see the most demand for environmental risk, as companies look for ways to protect themselves against the unpredictable forces of nature.
Today, environmental liability is one of the biggest concerns affecting companies in Latin America. And for this reason, companies continuously seek new ways to protect themselves.
There have been several episodes of serious flooding in the region in recent years, including in Colombia in 2010, Brazil in 2011 and 2012, and Costa Rica in 2012, explains Ixer.
“Not only is this a drag on economic growth for the countries affected, but companies face delays in production schedules, and distribution networks can be disrupted,” he says.
“Such losses help focus companies’ attention on business interruption insurance to protect against such losses in the future.”
According to Ixer, recent models have predicted climate change in the higher regions of the Andes is likely to increase flooding in cities further downstream, which will have particular impact in the Andean countries of Colombia, Ecuador, Peru, Bolivia and Chile.
On the other hand, tropical countries such as Brazil, Venezuela and much of Central America have seen higher than normal rainfall in recent years, which has led to localised flooding, and this may also be the result of climate change.
Indeed, Kirschner predicts demand for environmental insurance increasing over the next three years due to three synergistic reasons: greater awareness of environmental risks, stricter environmental laws that emphasise the economic guarantee for damages derived from licensed activities, and the general lack of specialised products in the commercial market to address environmental liabilities.
“To fill this need in the market, LIU offers insurance to help companies cope with environmental risks with products that respond to: coverage for clean-up costs both for sudden and gradual events, legal defense expense, and monetary compensation in accordance to the damages caused to people and property.
With Latin America exporting more products to more regions around the world, the exposure to product liability, including product contamination and recall has increased exponentially, according to Thais Kirschner, vice-president of operations for Liberty International Underwriters (LIU) Latin America. “Many countries to which Latin America exports, such as the US, have strong product liability, product contamination and recall rules in place that demand immediate response and could end up being very costly for the company involved,” she says.
“As export companies start to have a better understanding of the risk to their brand, they are looking for insurance products that provide cover for extortion threats.”
And with an influx of capacity from new insurers writing cover in various Latam markets, the credit market has been growing. According to Beatriz Araujo, partner at law firm Baker & Mc- Kenzie, trade credit risk is becoming increasingly important as Latin American companies are investing across borders.
“The US, Europe and China are big investors in the region, particularly in its natural resources, so there are a lot of different investors in the region with different exposure levels,” she says.
One of the biggest developments in Latin America’s economic landscape is the influx of international companies coming to the region, and with this, a notable change in the risk appetite of many Latin American based operations.
According to Javier Mercado, regional VP and head of financial lines for Latin America and the Caribbean at AIG, the current level of M&A activity in the region – and consequently a lot of companies coming in to the region that are selling to markets like Mexico, Colombia and Brazil – brings another level of need for sophisticated insurance products. “These companies are used to the concept of risk transfer when compared to completely local companies and that’s influenced the purchases of insurance like directors’ and officers’ liability (D&O) insurance,” he says.
“We see now that the Latin American market is catching up to more developed markets like the US and Europe.”
And according to Ixer, with regulators across Latin America continuing to strengthen their powers in the wake of the financial crisis, D&O cover will become more important. Kirschner also highlights that a new risk facing the region is the vulnerability of financial services organisations that invest and manage wealth for individuals and corporations, due to Latin America’s booming economy over the last decade, which has resulted in a growing demand for investment vehicles to house emerging wealth.
“The managers of these institutions are increasingly under more scrutiny, and shoulder more risk, as the amount of capital under their management grows,” says Kirschner.
“Combined products that offer D&O and errors and omissions coverage to help these individuals mitigate their exposure to this emerging risk are a growing market,” she adds.
KIDNAP AND RANSOM
The threat posed by kidnappers is still acute with over 20,000 reported kidnappings worldwide each year, according to Willis in its latest Resilience publication.
But even this could be under estimating the true scale of the problem. The official figure for Mexico alone is 2,000 kidnappings in 2011, for example, but the Council for Law and Human Rights says that the true figure is more like 17,000 – almost nine times the official estimate, according to the report. A number of factors are driving this increase, primarily inequalities in developing nations.
“A lot of the countries where kidnaps occur regularly have a fantastically wealthy element of the population at the top, a very small middle class and a very large poor population,” explains Paul Mills, executive director of security services at Willis’ specialist kidnap-and-ransom division, Special Contingency Risks (SCR).
Mills says more countries may match this profile amid the economic crisis. Mexico, for example saw a surge in kidnapping and extortion following the economic crash of 1994.
Latin America continues to pioneer methods, such as virtual kidnapping but while progress in reducing kidnapping has been limited, there is greater recognition of the risks.
The report states that the coverage itself is wide ranging. Policies usually cover not just the ransom (reimbursed rather than paid directly by the insurer), but various other expenses involved, such as travel costs, medical bills rewards for informants and time away from work for those released.
As a global threat, and in the nature of today’s economy where the exchange of information transcends all regional barriers, awareness of cyber liability in Latin American companies is growing exponentially. However, for companies operating locally, it is a relatively new risk.
“Multinational companies coming to Latin America are more well-equipped to deal with cyber risks because of the global mitigation structures they have in place, but local companies have less knowledge of how to protect themselves,” says Araujo.
According to Deloitte & Touche LLP, cyber attacks in Latin America have increased 500% since 2009 and 75% of enterprises in the region have suffered a cyber-attack in the last 12 months.
“This is an issue that’s being discussed in companies’ boards of directors because people are now understanding the financial impact that this might have and the reputational damage that it can cause.”
And according to Symantec, since 2009, Peru, Colombia, Costa Rica, Uruguay, Brazil, Argentina and Mexico have implemented or updated their privacy laws regarding data protection and have included sanctions as part of the norms used for failure to comply.
With economic growth and a general perception of better stability across Latin America, political risk does not pose as big a risk today as it has in previous years. However, according to Araujo, political risks will be more evident to multinationals entering the region rather than to local companies.
“Because the environment in many of these countries is very regulated, there is a lot of interaction with government, and tax and employment regulations are complex,” she says.
According to Ixer, political risk is important for companies deciding where to do business in Latin America, as this has changed dramatically in recent years. “Colombia, which was previously a political risk hotspot, is benefiting from a stable political environment and a business friendly outlook while others, such as Argentina, have declined in attractiveness to foreign companies because of the tense political risk situation there.”
However, as Mercardo points out, there are a lot of companies requiring political risk cover for certain countries and very few insurers who are willing to provide such selective coverage.
By Annie Roberts