Global Risk Insurance
Insurance, if used properly, is a great tool to shift legal risk or exposure to another entity (i.e., the insurance provider). Many companies fail to adequately consider insurance options, cover risk, or consider appropriate insurance tools that can shift or transfer risk of loss, litigation, or claims. A proper legal risk management program needs to adequately address these issues and to consider the insurability of risk. Insurance, if properly used, can be a great LRM tool. It all starts with a risk assessment such as set forth below.
1 Insurance Considerations: Risk Assessment
Conduct a risk assessment to create a business risk profile to identify factors that have the greatest financial impact, then integrate appropriate risk transfer strategies to
• stabilize insurance costs,
• mitigate extraordinary financial impact,
• ensure cost effective protection against catastrophic losses,
• leverage risk bearing capital, and
• Optimize tax and accounting issues.
Conduct an analysis of current coverage, amounts, deductibles, and excess. Consider custom-designed protection programs by product line (e.g., televisions, automobiles, or microwave ovens).
Evaluate product recall insurance. Is it necessary? If necessary, investigate establishment of a captive insurance company. What about geo-political risk? Consider insurance options.
2 Historical Data
It should be noted that companies use insurance as a risk mitigation or transfer tool and that they manage insurance programs differently than the average consumer. When developing a risk assessment of insurance considerations, data is extremely important when considering a probability or a risk-related event. The collection of relevant data will determine what kind of insurance policies can be obtained, the price, and even the availability of certain insurance programs. How far back a company can go historically to obtain data determines the potential risks a company faces and, therefore, what insurance program and provider is available as well as the costs involved.
When looking at risk insurance programs, the first question that should be asked by the company is whether it has accurate data. Does it have a good risk management information system in place? If not, does its insurance broker or provider have one? Or maybe the insurance broker or provider can help develop one. Accurate data leads to the right risk management strategy and the right insurance program. Lack of data makes it harder to have an accurate picture as to the risks involved and, therefore, harder to develop the appropriate insurance strategy and program. It is necessary to obtain accurate historical data if at all possible.
The main reason that companies make extensive use of insurance coverage is to diversify and shift risk through use of business-related insurance. Insurance, if properly used and maintained can be a major risk management tool. A major issue facing companies when trying to insure legal risk is the insurability of the risk. In essence, the cost of insuring the risk may be too great to justify the particular form of risk insurance. So when a risk assessment identifies a business risk, not only does the company need to determine if insurance coverage exists to cover the risk, but whether the cost of such insurance justifies its acquisition. Many manufacturing companies will not purchase product recall insurance or similar insurance because of its expense. Some manufacturing companies or organizations will not even purchase credit insurance because of its expense. Therefore, a company or corporation must pay attention to costs and consider methods to reduce the cost of insurance.
The US-China trade dispute as well as the Japan-Korea dispute have to a certain extent caught many companies as well as investors off guard. Considering these political and economic events, many companies should consider reviewing old risk management policies and procedures, if they haven’t already. Geo-political risks are now front and center, whether companies are prepared for such risks or not.
Companies face many kinds of risks when engaged in offshore projects; but geo-political risks can be the most serious if not handled properly. Such risks comes about when a government changes its policy, ideology or even itself which creates instability, disorder, strikes, riots, war, embargoes, etc. What must be done to manage such risks? Political risk insurance comes to mind, but some forms of political risk insurance that are offered by capital –exporting nations ( such as OPIC, etc.) is subject to politically motivated conditions or motivations that may not take the needs of the investor into account. Case in point- OPIC can only operate in countries which have a bilateral investment treaty with the US. If you are a US investor trying to invest in a country which lacks a bilateral investment treaty with the US- you are out of luck when trying to obtain political risk insurance from OPIC. This is true of outer countries which supply similar political risk insurance through export development programs.
The answer for some companies therefore, is to consider obtaining private political risk insurance. Due to the increased use by some companies of political risk insurance from government agencies as well as a lessening of perceived political risk, private political risk insurance offerings have exploded. Several markets provide private political risk insurance including Lloyds of London insurance syndicates as well as groups operating under a reinsurance treaty that are controlled by an underwriter. There are advantages to this.
As private political risk insurers have no political agenda to worry about, there are normally no political pre-requisites for the issuance of insurance. The host country doesn’t need to be poor and the investor can come from any part of the world. Also, the private insurance approval process can be much faster than the approval process of governmental agencies. Of course it should be noted, that unlike governmental agencies, private political risk insurers are in business and therefore the coverage offered by them can be more expensive than compared with their government counterparts.
All in all, political risk insurance should be considered when investing abroad, especially in markets that are uncertain. There are always ways to manage risk, and political risk insurance is just another form of risk management. It should be carefully considered, especially in today’s rapidly changing world.