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Emerging risks in Latin America.

WHEN IT COMES to the new world order of political and economic standing, no country likes being left behind. Latin America stood on the sidelines when the former Eastern Bloc nations made the move to shift their centrally planned economies, with some success, to free market economies through liberalization policy. As Robert Lynyak, senior vice president and managing director of Chubb & Son Inc., pointed out, many Latin American countries, which viewed themselves above the communist nations, suddenly saw themselves being left behind. Could it be that the fall of the Berlin Wall was Latin America's wake up call?

Mr. Lynyak was just one of several speakers at a recent International Insurance Council roundtable meeting on Latin America in New York. An overriding sentiment from all speakers was that Latin America is not a homogeneous marketplace that can be handled with uniform strategic planning. Each area has its own unique system and nuances. Discussing where that region stands from a risk management point of view, John Wencelblat, assistant director of international insurance for American Home Products Corporation in New York, stated, "Latin America is a mosaic of different nationalities and ethnic groups, all with different socioeconomic systems and objectives."

The majority of Latin American countries are now characterized by a high degree of political stability, a trend that is expected to carry over into the coming years. As far as opposition to democracy is concerned, Felipe Ortiz de Zevallos, founder and chairman of APOYO, a Peruvian-based consulting, publishing and polling institution, belives that despite the recent coup attempt in Venezuela there has been a "convergence of democratic trends and economic policies in the region."

Unlike in the past, most of the region is looking toward integration and free trade, according to Mr. Ortiz de Zevallos, which, from the multinationals' standpoint, would help in their long-term planning for the region. On this issue of the economy, at least the short-term outlook is relatively favorable. "There has been significant progress in structural reforms--open trade, more proven monetary policies, deregulation, liberalization, privatization--all around the region," Mr. Ortiz de Zevallos asserted.

Of the major Latin American markets, only Brazil has yet to carry out a significant stabilization program. Recently there has been significant recovery in the region, 4 percent to 5 percent in Gross Domestic Product (GDP) growth; but again, this excludes Brazil, as well as Peru. Inflation is coming down, the stabilization programs are in progress, and since interest paid on exports is going back to the 20 percent level experienced in 1980, the debt problem is again becoming more manageable.

Historically in Latin America, political instability and increases in violence--phenomena that the risk manager has had to deal with here more than in any other region, except perhaps the Middle East--tend to result from prolonged economic austerity, whether it be government sanctioned or not. Thus, there are three fimportant factors to watch that may have negative long-term political, economic and hence business consequences: fragile fiscal disequilibrium, high population growth, and extreme poverty and skewed income distribution.

Risk Management Trends

ACCORDING TO Mr. Wencelblat, "many U.S. multinational corporations, especially in hi-tech areas, have been taking an approach to standardized loss prevention programs and safety standards that go far beyond those set up by local governments or by local legislation." Stressing the importance of this issue, he states that "these standards are the result of worldwide research and development applied to specific areas of manufacturing processes, emphasizing the hitech area," adding that the implementation of these loss prevention safety standards on a worldwide basis will require enhanced investment and research analysis that is commonly not found in many Latin American nations.

The risk management community operating in Latin America tends to rely on its insurers to furnish those services necessary to minimize loss potential. However, Mr. Wencelblat finds that "even in 1992, there are some multinational insurers that consider loss prevention and safety to be simply ancillary services and nothing else." Looking to the near future, he is optimistic that insurers, brokers and risk managers "will work closely together to minimize loss potential as well as provide safer working conditions."

Mr. Wencelblat feels very strongly about the benefits of loss prevention and safety. For him, as well as the risk manager, "loss prevention, as well as safety, with respect to local management, is a non-negotiable item if we are to provide safe workplaces the world over."

Risk Management Issues

ECONOMIC PROSPERITY, even on a modest scale, will considerably change the risk management environment in Latin America. Instead of emphasizing exposures due to terrorism or guerrilla activity--property destruction, employee kidnappings, murders or injuries, service or production interruptions--risk managers will deal with products liability, environmental liability, and employer liability exposures.

Products liability is becoming an issue following the advent of consumerism in that area of the world. Mr. Wencelblat cites the substantial increase in awards and the surprising number of claimants who initiate litigation against corporations, which is an entirely new phenomenon. It is anticipated that as the standard of living improves in Latin America, consumerism will follow, along with the frequency of products liability claims being filed.

Environmental liability, involving exposures that risk managers in Latin America previously had little legal reason to emphasize, is another area that will have to be reexamined. This is due in part to changes in local legislation with the establishment of environmental standards.

Mr. Wencelblat remarked that even U.S.-style environmental protection agencies are being established. He also notes that, in anticipation of further legislation, "many industries are presently changing their manufacturing processes, not only to conform to local standards, but also to follow worldwide standards in an effort to minimize loss potential." Further-more, he adds that "although worldwide insurers have been aware of this exposure a long time, only recently have Latin American insurers taken notice."

Employer liabilities represent another significant issue on the Latin American scene. In particular, Mr. Wencelblat tells us of an Argentine case regarding workers' compensation where "one of the nation's major worldwide insurers decided that this exposure is no longer insurable. We policyholders are becoming selfinsured but not by choice." To his surprise, however, he has found that "insurance brokers in Argentina are willing to provide workers' compensation and cover other types of employer liabilities, whereas the international insurance community cannot."

Previous Exposures

LEST ONE GET the wrong impression, previous exposures still do exist, and actually prevail, depending upon the country in which one's firm is located. Earthquakes will continue to wreak havoc in Mexico and Central America, while mud slides, floods, hurricanes and tropical storms will continue unabated, particularly in Central America and the Caribbean.

Gerrilla activities and terrorism will also keep the risk manager busy in certain countries. Though Mr. Lynyak sees a decline in narco-terrorism aimed at foreign corporations in Colombia and Venezuela, the situation in Peru is quite a different story, according to Guillermo Carrillo, managing director and CEO of La Vitalicia, a leading Peruvian insurance company. In Peru, more than 90 percent of the major companies find it necessary to hold an insurance policy that has terrorism coverage. However, indirect damage or consequential losses generally are not included under this coverage.

The indirect effects of terrorist attacks have had an enormous impact on operating costs in Peru, with security measures representing the greatest share of the cost increase. To quantify, Mr. Carrillo reported that the economic losses in Peru amounted to approximately $18 billion during the past decade, and nearly $3 billion in 1990 alone. In 1991, this figure dropped to $1.85 billion. Mr. Carrillo notes, "Out of this figure, 95 percent are estimated costs of opportunity and business interruptions, while 5 percent are direct losses. The main factor was the blowing up of electrical transmission towers that we, of course, don't insure."

With a rise in intra-regional trade among a market of over 300 million people, and the opening of investment opportunities to more sectors of the economy, Latin America is well positioned to leap out in front of Eastern Europe once again. As a result, the economic recovery and predicted growth in Latin America will present new and different challenges to the risk manager, while some old exposures disappear ... albeit, not soon enough for most companies.
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Author:Kurland, Orin M.
Publication:Risk Management
Date:Apr 1, 1992
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