Emerging multinationals move into riskier territory

As companies from mature markets move into exciting and fast-developing territories, another wave of outward-bound businesses is expanding into other emerging economies. Hailing in general from Latin America and Asia, they are working in close collaboration with the insurance industry as they tackle countries that western multinationals may consider a step too far.

As AIG’s Maggie Nicol, manager for political risk, points out, these companies are open to doing business in politically unstable countries, but with their eyes wide open. She says: “They are companies with a higher tolerance for risk and we see a trend of investors from Brazil, China and India taking the place of the more cautious western multinationals”, she explains. “This phenomenon is likely to increase, particularly in areas where sanctions apply to companies from the EU and the US, but not to other potential outside investors.”

Other observers such as Chris Lay, head of business development for Marsh’s international division, identify the same trend. Many of our clients in Asia and Latin America are moving into MENA and Africa, including East Africa,” he says. “There’s a lot of activity and growth across regions.”

As they dip their toes into these sometimes dangerous waters, the outward-bound multinationals are adopting appropriate measures to protect the business. “The risks they face are the same as those of mature multinationals, but their priorities are different,” explains Lay. “Whereas established companies are more concerned with compliance and reputational risk, emerging multinationals are preoccupied with the security of their people, liquidity, cash and payments, as opposed to assets and liability.”

In short, they are concerned by the more immediate issues.

The further they venture from their home base, the more country risk becomes a top priority. “Beyond the well-known difficult countries such as Venezuela, Egypt and – most recently – Ukraine, and to a more frightening  degree Russia, we see that multinationals are exposed to, and concerned about, increased political instability in less obvious areas”, adds AIG’s Nicol.

Ranges of exposure

Nigeria’s mounting problems with terrorist group Boko Haram serve as a warning, but Nicol cites a list of other less dramatic political risks by way of evidence. Trade restrictions (export ban of nickel in Indonesia), civil disorder and political stalemate (red shirts versus yellow shirts in Thailand, which has led to a military takeover), infrastructure bottlenecks (the difficulties of exporting coal from the new resources projects in Mozambique), and corruption and expropriation (mining in Guinea). To varying degrees, all of these are the results of unstable or ineffectual regimes.

For many of these emerging multinationals, the learning curve is rapid. As South-East Asia-based AIG’s Rudi Spaan, head of broker and client management, points out, Asian companies in particular face more than their fair share of problems in managing risks in a new environment, in part because they had limited exposure to the broader concept of risk management. Back home, a policy against fire, physical loss or damage is often considered sufficient for the job.

Thus, Asian companies often get a rude shock when they move further afield. “As they compete on a global scale, some are finding out the hard way that aspects of liability and compliance in doing business overseas are very different to those in their home country – and so too are the insurance requirements,” Spaan says.

Further, the range of exposures in the developing world appears to be growing rather than diminishing. Despite the best efforts of the UN, the International Monetary Fund and other multilateral agencies, commercial risks abound in many regions. As Marsh’s Lay notes, the firm’s risk-weighted map of the world features only a handful of green spots. “Most of it is covered with ambers and reds,” he says.

Moreover, risk is a moving target. As Lay summarises: “Companies cannot assume the current landscape will stay the same. They have to make decisions on the basis that it is volatile. The pace of change is ever-increasing.”

Multinational coverage

A common problem for most multinationals is, ironically, multinational coverage. As Guenter Droese, chairman of the European Captive Insurance and Reinsurance Owners’ Association, points out: “One of the most challenging concerns is how multinationals can cover all their risks in various countries based on a locally issued policy linked with excess layers in an international programme. The local policy doesn’t usually cover either the breadth of insurable risks or the limits wanted by the multinational within the programme. Non-admittance is the big issue.”

This article was taken from StrategicRISK’s guide to multinational risks supported by AIG. This guide can be viewed or downloaded here.