Risky business: political risks still abound for foreign companies in Latin America, and insurers are there to profit.
They tell you in business school that reward loves risk and, apparently, that's the case in Latin America Latin America, the Spanish-speaking, Portuguese-speaking, and French-speaking countries (except Canada) of North America, South America, Central America, and the West Indies. for multinational companies.
Despite a wholesale move to democratic capitalism Democratic Capitalism is an economic ideology based on a tripartite arrangement of a market-based economy based predominantly on economic incentives through free markets, a democratic polity and a liberal moral-cultural system which encourages pluralism. across the region, political crises in Venezuela, Bolivia, and Ecuador are creating untold hazards that may well lead to significant business losses.
Expropriation The taking of private property for public use or in the public interest. The taking of U.S. industry situated in a foreign country, by a foreign government.
Expropriation is the act of a government taking private property; Eminent Domain is the legal term describing the , foreign exchange moratoriums, political violence--the list goes on. According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. the Multilateral Investment Guarantee Agency Multilateral Investment Guarantee Agency (MIGA), specialized agency of the United Nations. Formed in 1988, with headquarters in Washington, D.C., it is a member of the World Bank Group (see International Bank for Reconstruction and Development) and membership in the (MIGA See Multilateral Investment Guarantee Agency. ), a foreign-investment insurance agency run by the World Bank, political risk concerns helped cut the flow of investments in the developing world by 23% to US$135 billion in 2003, compared with just two years earlier. While economies gained steam in 2004, political-risk premiums remained high, as companies stayed on the sidelines On the sidelines
An investor who decides not to invest due to market uncertainty.
on the sidelines
Of or relating to investors who, having assessed the market, have decided to avoid committing their funds. as opposed to investing abroad, according to MIGA.
U.S. insurance giant Aon says the number of large-scale confiscations of private properties from governments has tapered off dramatically in the last 20 years, but instability still exists.
To mitigate potential losses, companies are turning to political risk insurance. MD International, a mid-size medical products exporter in Doral, Florida The City of Doral is a former census-designated place and a newly-formed city located in north-central Miami-Dade County, Florida, west of Miami International Airport. The City of Doral takes its name from the famous golf and spa resort located within its municipal boundaries. , recently purchased a policy because the company's lender required it before financing a transaction in Latin America. "We would not have been able to do the transaction without it," says Maggie Morales-Perez, chief financial officer of MD International, without giving details. "It's not something we could finance ourselves,"
In countries where MD International has not been able to get political risk insurance "we are out of the picture," Morales-P6rez says. As a result the company has not been able to compete in Argentina, Ecuador and Venezuela. "We have had to pass on some of the deals because we can't get insurance, which is affecting our competitiveness," she says.
Some companies are finding that turmoil, whether political or economic, reduces the availability of risk insurance. "In the difficult markets, coverage is being written on a selected basis" says Matt Handwork, a partner in the Columbus, Ohio Columbus is the capital and the largest city of the American state of Ohio. Named for explorer Christopher Columbus, the city was founded in 1812 at the confluence of the Scioto and Olentangy rivers, and assumed the functions of state capital in 1816. office of IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel. North America North America, third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km), the northern of the two continents of the Western Hemisphere. , a specialty broker of political risk and trade insurance that helped MD International get its policy. "Often, many small transactions are difficult to provide coverage for because on the political risk side, if they are too small to generate enough premiums, then the insurers are not interested."
While numerous factors, such as the amount of exposure and type of coverage, play a role in pricing, premiums normally range from 0.5% up to 3% a year on exposed limits. For example, the cost on a $100 investment would run from $0.45 to $2.70, based on insuring 90% of the transaction. However, rates have been known to go as high as 5% in regions where volatility is greater. Of Latin America's major economies, only Chile is considered to be a low-risk country, according to Aon, a U.S. insurance giant. Venezuela, Colombia and Ecuador are considered to be high-risk countries while Peru, Bolivia, Uruguay, Paraguay and Argentina are considered medium-high risk countries.
Despite the region's volatility, insurance companies and brokers say that demand is high. "We had significant growth last year," says Dan Riordan, executive vice president and managing director at Zurich North America. "There is enough going on in the emerging markets to keep us busy for some time to come. Large multinationals that have operations throughout the world are coming back into the market rather than self-insure."
Zurich North America writes up to $75 million per risk covering up to 15 years. "We cover large and we cover long," Riordan says. "Our industry doesn't have a high frequency of loss, but it does have a high severity. That's how we look at price risk."
Political risks can shift rapidly, disrupting business and leading to unexpected losses. Different businesses can react in different ways, and that's why underwriters first look closely at a company seeking risk insurance and at its experience in a particular region. "We look at the project specifics, how well that project has been vetted, structured and organized," says Riordan.
Insurers also look at how a company will deal with problems should they arise. Will a change in government affect its industry? Does it have a strong joint venture partner? Does it have dispute resolution agreements built into contracts? "If that's not been addressed, then those are risks we would not consider," Riordan says.
Availability also depends on a company's industry. For example, general manufacturing plants are considered less risky than companies extracting more politically sensitive products such as oil, gas or silver.
Bolivia is a prime example, says V. Manuel Rocha Manuel Rocha is a United States diplomat and former Ambassador to Bolivia. Background
Rocha graduated cum laude from Yale University in 1973, and he received a Master's Degree in Public Administration from Harvard University in 1976 and a Master's Degree in International , former United States Ambassador to Bolivia The following is a list of United States Ambassadors, or other Chiefs of Mission, to Bolivia. The title given by the United States State Department to this position is currently Ambassador Extraordinary and Minister Plenipotentiary. and managing director of Globis Group, a Miami global business development company. "Bolivians feel gas and oil should be developed by a public, national company, not a private company. So when private companies move into those areas, they become vulnerable," says Rocha.
Creeping. Political risks such as property expropriation and war are typically associated with the military governments of the past, and not of the more democratic administrations of today. "Expropriation drives away other foreign investment; therefore most governments don't consider it because they would only be shooting themselves in the foot," says Rocha. But that doesn't mean expropriation is dead. Today, it tends to be subtle and has come to be known as "creeping expropriation Creeping expropriation
The act of a government squeezing a project by taxes, regulation, access, or changes in law. ," such as when a government regulatory body changes the rules in the middle of the transaction, resulting in losses for a company.
"It's not uncommon. From one administration to the next there will be changes," says Francisco Cerezo Francisco Javier Cerezo Perales (born in 1971), known as Francisco Cerezo for short, is a Spanish former professional road bicycle racer. He rode at the Danish professional cycling team of CSC-Tiscali, which he joined in 2001 from the Spanish team Vitalicio Seguros. , a partner who handles international and corporate matters for Tew Cardenas, a law firm in Miami. "There is concern that one administration might enter into an agreement and then fast-forward to a few years later and there is another administration and they feel they can renege re·nege
v. re·neged, re·neg·ing, re·neges
1. To fail to carry out a promise or commitment: reneged on the contract at the last minute.
2. ." This can happen through the raising of taxes or fees charged, or the tightening of regulations, Cerezo says.
Insurance firms track such policies closely. Each year, Aon releases a political and economic risk map. It outlines not only areas of high risk but also specifies the risks companies face. "Our client base is looking at what political risk means before going to the market. We are seeing more awareness," says Bryan Squibb, head of Aon's trade-credit practice in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. .
However, with a constantly changing political climate, industry trends can shift at a moment's notice. A few years ago the insurance industry was nervous prior to the election of Brazilian President Luiz Inacio Lula da Silva, and political risk insurance for that country became very expensive, if it was available at all, says Sam Moore, a partner in the Columbus, Ohio office of IBC IBC International Building Code
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"Anything longer than one year was difficult to place," says Moore. "People were uncertain what the policies of this so-called 'people's president' would do to the economy. But here we are in the third year after the election and things are looking as good, or better, than they ever have in Brazil." The perception of risk is lower, rates have come down, and the availability of insurance has improved, he says.