Contracting out risk critical in foreign markets–Portugal

“One of our main concerns is linked to the contracts that we sign,” said António Cândido, Chief Risk Officer at electromechanics and electric infrastructure firm Efacec. “Almost 90% of our business is outside of Portugal. There are clients we do not know well, or countries where we do not know the law as well as we know Portugal’s legislation. Sometimes contracts involve working practices that we are not used to.” As a result legal aspects of commercial relationships have become a major concern for the risk management department, he said. “Our risks are linked to the management of complex projects. We can transfer some of them to the insurance market, but it is a small share of the risks we face. Our attention to contracts begins in the commercial stages, as we need solid, fair deal contracts with provisions that guarantee protection for all parties. During the execution of the project, we need results to be predictable,” he explained. “The legal aspect is increasingly having an influence on our operations,” agreed Mariana Lopes, Director of Financial Management and Risks at drinks company Unicer. “We have been investing in increasing our sales in markets like Brazil, Mozambique and the United States. This creates some difficulties in terms of complying with regulation and managing contracts. Contract management is at the top of our agenda today. We try, as often as possible, to transfer the management of risks to contracts.”hideShe added: “We are building a production plant in Angola, but in other markets we work with a subcontracting model and that implies a lot of contract negotiations. Brazil, in terms of legal risks, is probably even worse than Angola.” A growing reliance on foreign markets has broader implications for Portuguese organisations and their risk managers. “At the top of the list of risks for us comes the reliance on the Angolan market,” Ms Lopes said. “Angola already answers for 25% of our sales, and 40% of our EBIDTA. But we know that the Angolan market is influenced by variables that most of the time are completely out of our control. In 2013, for example, we had to deal with a period of three months when our products stayed at Luanda harbour due to trade barriers imposed by the government and we were unable to be cleared through customs. It meant three months of lost sales that cannot be replaced and caused some substitution of our products with domestic alternatives.” Global programme concerns The expansion of international activities has also highlighted the importance of efficient insurance arrangements for exposures faced by Portuguese companies abroad. Global programmes have therefore emerged as a solution to many of the problems they face. However, in some of the most important markets placing a multinational programme is far from easy. “Global programmes are the best way to avoid duplication of coverages and to optimise costs. With the geographic distribution that we increasingly have this is something that has become an ever more pressing issue for our group,” said Luis Campilho, Insurance Manager at Efacec. “Global programmes are essential. We need them to manage our insurance coverages in an adequate way and to obtain the best cost to benefit relationship,” said Demetrio Tahoces, Director of Insurable Risks at power and electricity group EDP. “But international hurdles to the efficient implementation of global programmes are enormous on the regulatory side. The case of Brazil is typical. It is not completely solved yet. There are solutions for only some aspects of the integration of Brazil in global programmes, and they usually imply high costs,” he added. There are several other countries in which placing compliant programmes is difficult, for example Argentina, Mexico and some Arab states, said Santiago Martín, CEO at HDI Seguros España. “It is not an easy subject. There are some options, such as financial interest clauses, that in my view are not good solutions. Good local policies added to a master policy that acts an umbrella are the best alternative, even though they imply some costs. But here the role of the risk manager is very important. Global programmes also require stability, as they are difficult to set up. It can be a tricky task.” The implementation of a global programme demands heavy work. Companies often need the help of partners in the insurance market. It is also a task that may need to be developed gradually, as Efacec is currently experiencing. “In a first phase, the local units made their own arrangements with local insurers and brokers. But now we are working towards the optimisation of coverages,” Mr Campilho said. “We have chosen a big global broker to do this job. We came to the conclusion that we needed a broker with a global reach to help us with this task. So now we are working with our units in all the countries where we operate to do the transition for a global programme system and avoid duplications.” The support that brokers and insurers should provide goes beyond simply making coverages available, according to Pedro Cupertino de Miranda, Risk Manager at Sonae, the retail and finance group. “Capacity is not the only issue. It is the whole package that counts,” he said. “Service, proximity and local presence around the world are all important factors. There are things that local insurers are less prepared to offer than the global ones.” According to Mr Miranda, there are areas where risk transfer partners need to up their game. “One area that could be improved is the settlement of claims, especially the time that it takes to evaluate a loss and for indemnifications to be paid,” Mr Miranda said. “Also the management of programmes, which are often very complex structures and involve contracts with complex wordings. Sometimes it is only when a concrete situation occurs that the wording of a contract gets clarified.”

Contracting out risk critical in foreign markets–Portugal

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