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Risks in developing nations pose an uphill battle.

Risks in Developing Nations Pose an Uphill Battle

In developing countries risk management practices differ from those in the industrialized world. Simply stated, the use and understanding of risk management concepts and practices is quite limited. While implementing a global program in industrialized countries is a challenge in itself, doing so in developing countries is even more difficult because of unfamiliarity with risk management principles.

Risk managers in charge of a global program with plants or operations in less developed countries are likely to find a greater possibility for miscommunication and resistance between themselves and local managements. In addition, they will likely encounter difficulty as they try to monitor the operations' compliance with the global program. For instance, local managers may only feel comfortable with a token deductible, which may very well be the standard practice in that country, yet the corporation could save substantially by accepting a higher deductible.

Also, risk managers should not count on local managers to supply them with reliable, if any, information, including valuations, detailed descriptions of minor claims, information on packaging, labeling and instructions and identifying risk of business interruption. Local managers are not likely to consider the exercise as meaningful based on their own experience with insurance programs.

When it comes to a global loss prevention program, local management may view participation as too costly and time consuming, especially when they have done just fine for many years by simply meeting local inspection requirements.

Problems may also arise with a non-admitted difference-in-conditions policy, which affords coverage extensions at lower cost or at more favorable terms and conditions, especially in countries with tariff rates. A local insurance manager may not have confidence in such coverages, and may even purchase duplicate coverage locally without notifying the corporate risk manager. Or, if the DIC policy provides some primary coverage as "sleep easy" coverage, local management, not understanding the intent of the coverage, may cancel local coverage.

No doubt, a self-insurance program with a large retention and a captive is difficult to explain to someone unfamiliar with risk management concepts. A goal would be to gain local management cooperation in expediting cash flow to the captive by having local premiums paid immediately. The local management, however, may be accustomed to a 90-day time frame for payment; thus, it will be a challenge to win its cooperation.

Latin America

A look at the situation in some developing countries around the world, particularly in Latin America, can give a fuller picture. In Argentina, for example, only subsidiaries of multinationals and a few large local firms practice risk management in their day-to-day business. Due to government control over the insurance industry and fixed tariff rates, economic incentives which could lead to better loss control measures and higher levels of retention have generally not existed. Usually loss prevention and control are applied to reinsurance programs outside Argentina. There are few independent risk management consulting firms and claims adjusters. The only brokers or insurers providing risk management services are affiliated with large global organizations, such as Alexander & Alexander, Johnson & Higgins, American International Underwriters and CIGNA.

The common practice in Argentina is to buy the basic insurance protection available in the local market at tariff rates. The local market does not use historical loss analysis to determine expected frequency and severity, and as a result, retention schemes such as captives are rarely considered. Coverage for business interruption is not a familiar concept there.

In addition, departments that in an industrialized country would normally be consulted about liability in the risk management process are generally not consulted in Argentina. For example, the marketing department of an Argentinean firm is generally not consulted about the liability implications of advertising, packaging, use instructions and product warnings.

In neighboring Chile, there is a marked increase in the practice of risk management especially among large companies. Although loss control inspections, recommendations for risk improvement and follow-ups for compliance are common practices at these Chilean firms, the majority of companies rarely employ such risk management techniques. As in Argentina, risk management services are available from international brokers and insurers. Since there are no established engineering standards for loss prevention, firms with loss prevention programs use Best's Underwriting Guide or National Fire Protection Association standards, both of which are borrowed from the United States. Losses are calculated by insurers as part of their underwriting process, but rarely do firms analyze losses themselves as part of a risk management program. High retentions are not usually taken, and captives appear to be only used by multinationals operating in Chile.

There, however, is an awareness growing about liability considerations in product marketing, especially among those exporting products to industrialized countries. Thus, some firms are involving marketing and production personnel to at least make educated decisions about the potential liability of a product and ways to reduce loss exposures. Also, risk management consulting and claims adjustment services are available; however, most are based outside Chile and must be approved by the Superintendency of Insurance.

Most Chilean firms simply purchase, with the aid of a broker, whatever insurance is available for perceived risks. They pay little attention to alternative means of managing risk.

The practice of risk management in Colombia has been developing over the past five years, due to the impetus provided by major global brokers operating there. Consequently, Colombia is relatively advanced in risk management compared to other developing countries. However, loss control combined with risk retention has become an alternative to simply purchasing available insurance. Some firms use professional risk management consultants who are primarily connected with major global brokers. Risk and safety engineering programs are also frequently used. Risk managers and other industry professonals can easily find seminars on the technical aspects of loss prevention and control.

Some techniques for identifying areas of potential loss are well developed and widely used among large companies, including physical inspections, extensive risk analysis questionnaires, reviews of production and delivery flow charts, analyses of financial statements and descriptions of losses. Yet on the downside, cooperation among departments involved in the risk management process is uncommon: The financial department is responsible for insurance, and it obtains little assistance from the production and marketing areas in identifying and reducing risk.

In Peru, insurance is the sole method used to reduce the impact of loss. Thus, risk management is virtually non-existent in the country. In addition, the only sources for risk management advice outside the realm of insurance are the local affiliates of major brokers.

Loss prevention and control is limited to protecting property from terrorist attacks. Analysis of historical losses to project future loss frequency and severity is generally an unfamiliar concept. Risk analysis questionnaires, production and delivery-process flow charts and financial statements are rarely used when managing risk. Interdepartmental cooperation in risk identification barely exists.


Compared to other developing countries, awareness of risk management in India is relatively widespread among industrial companies. The four state-owned insurers have risk management departments with trained engineers who carry out inspections of plants and make recommendations for loss prevention measures. The state insurers also share a sister company called the Loss Prevention Association of India. In addition, a few private firms provide risk management consulting services. Yet despite the availability of risk management knowledge and techniques, risk management principles are usually only applied to large risks. Instead, most companies tend to rely on insurance for protection. Deductibles or self-insured retentions are rarely set high enough to cover more than the smallest losses.

Compliance with insurers' loss prevention recommendations results in lower premiums. Few companies, however, study historical losses or reduce insurance costs by self insuring predictable losses. Insurers, on the other hand, do undertake this loss analysis exercise, on an aggregated basis, when setting tariff rates. Besides physical inspections, production and delivery-process flow charts are developed to locate vulnerable areas or facilities where a loss could have severe impact. On the other hand, Indian companies do not use extensive risk analysis and financial statement analysis, and the involvement of production or marketing personnel in the risk management process is rare, except with certain property loss control programs.


Risk management is not yet a familiar concept in Kenya, but it is becoming more well known due to the presence of major global brokers. The idea of risk retention is given little thought, as most companies are too small to absorb anything beyond minor losses. Also, there is little financial incentive in local rating practice for taking large deductibles. While there are requirements under local law with which to comply, such as an annual inspection of all pressure vessels by government-approved engineers, it is not unusual that cost considerations limit what loss prevention measures are implemented. However, a large premium discount is usually available if sprinklers are installed.

Since there are no risk management consulting or loss control services available in the local market, these services are usually imported from Europe. Companies working with affiliates of global brokers sometimes analyze past losses and develop means to reduce loss potential.

From a liability perspective, little consideration is given to the potential for loss due to, for example, improper packaging, which differs from the detailed review this would receive in a liability-conscious country like the United States.

Program Harmony

Considering the lack of sophisticated risk management knowledge in developing countries, what should the risk manager do to get local management's cooperation in a global program? The first step would be a general education program on insurance and risk management principles and practices. Insurance managers in developing countries should be educated about the corporate insurance mechanism worldwide and, more specifically, about risk management. Depending on the country and level of sophistication, the courses needed can vary from general insurance to loss control techniques.

Once a company has determined the local insurance staff's risk management knowledge, information can be gathered about educational opportunities in the country. For instance, insurance and risk management seminars may be offered by domestic and global underwriters, reinsurers and brokers. Courses or seminars may be taken at insurance schools such as Instituto Technologico de Capacitacion de Seguros in Peru or the Insurance Institute of India. In addition, formal programs leading to professional designations such as the Chartered Property and Casualty Underwriter in the United States and the Fellow of the Chartered Insurance Institute in the United Kingdom are available on a correspondence basis.

Although written and telephone correspondence with local staff personnel may be adequate in some cases, the fullest understanding of the global program is achieved with a personal visit. While operations in all countries should be visited, major subsidiaries in developing countries should be priorities.

Practically speaking, for companies operating in 30 or 40 countries, this approach could prove unworkable in terms of the time and expense required. An alternative is to arrange meetings at regional offices or other acceptable locations. Each subsidiary or country insurance manager should be asked to attend.

An international broker is an excellent source for help in the implementation of a global program. The executive assigned to the account may accompany the risk manager on personal visits, facilitating access and assistance to explain the specifics of the program and the requirements of that particular country. The local broker can also assist in overcoming the language barrier and help monitor compliance with the program.

Risk managers should consider creating a client service manual which contains broker service specifications and guidelines and an outline of the international insurance program. The guide should be distributed to the local insurance manager and local broker. The section on service specifications should include such items as account review procedures, services provided and the broker and corporate risk management contacts. The section should also include the objectives of the program, including the corporate risk management philosophy, definition of insurance terms, information about the broker and the underwriter and a summary of the insurance purchased.

Thomas J. Drag is senior vice president and director of the global client service group at Alexander & Alexander in New York.
COPYRIGHT 1991 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Author:Drag, Thomas J.
Publication:Risk Management
Date:Oct 1, 1991
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