Expansion into new markets – understanding the risks

There is little doubt that Covid, Russia and inflation, have created a volatile and unprecedented period of uncertainty. In addition, after nearly 15 years of expansionary monetary policies, leading central banks have had to shift their strategy, adding to one of the most challenging economic business environments in decades.

It is also true that demand in supply chains has rarely been higher, and the need for very substantial investment in sustainable infrastructure and other transition assets, together with energy security and defence, is creating significant growth opportunities, notwithstanding the complex environment. In this context, multinational businesses are facing important decisions when it comes to expansion into new markets, as David Rahr, global leader, Marsh Multinational, explains.

“Corporations and CFOs are continually thinking about where they want to do business in the future, where they should be supplying product from, where they should invest, which market to be in, pull back from or do more research on,” he says.

These are all difficult questions. But they are considerably more difficult when it comes to emerging markets. Rahr points out that with emerging markets, the reward is perhaps greater in terms of growth potential but with that comes increased and maybe elevated risks. And in that situation, businesses are looking for information from a diverse non-standard set of resources to help support business decisions, involving legal, finance, compliance and many other functions.

The right investment decisions
With the unsettled state of globalisation at the moment, the question is: how can global risk managers ensure they are making the right investment decisions on where to do business, and what should they be asking and assessing?

“I think that the insurance industry and brokers like Marsh in particular have a viewpoint that may be considered a non-standard viewpoint. And it is becoming more and more apparent that our clients are looking for more information about the risks that they’re going to be facing as they make these decisions. Even in these challenging times, companies have the opportunity to drive down, and even out, volatility.

As an example, Rahr points to inflation: “Inflation is not something unique to emerging markets but historically, and I think forecasted ahead, emerging markets will always carry a higher inflation rate and risk on average. It’s important to note that inflation impacts markets differently. Inflation in developed markets can heighten the risk of social unrest as basic food and energy commodity prices rise. However, government capacity in such nations to modify the impact of inflation for the poorest, through welfare spending, together with the freedom to protest in most democratic states, serves to modify the impact of social unrest. By comparison, emerging and less developed nations, with food and energy import dependencies and low levels of freedom, may find that high levels of inflation can trigger sudden, widespread and violent social unrest. In extremis, this may lead to regime change – as we saw in north Africa in 2011.

Inflation impacts risk and insurance in a number of areas, most obviously around property, and ensuring that property values properly reflect what it costs to repair or replace an asset in today’s market, particularly where some environments are seeing 50% inflation.

“Emerging markets also tend to have a less mature insurance marketplace or a more restrictive marketplace, which creates different challenges for our clients in terms of programme structure,” says Rahr.

Non-traditional insurance risks
“So there is a whole bucket of what I would call non-traditional insurance risks. There is credit risk, performance risk, regulatory risk, political risk, economic risk, environmental risk, human capital risk, logistic and supply chain risk, and technology risk. I think those risks in that bucket are becoming more of interest to risk managers,” he says.

As Rahr points out, you can usually measure the risk of a building burning down or being compromised but it’s much harder to measure the impact of political risk or economic risk or legal risk. This is where brokers like Marsh are in a position to draw on expertise and insight across different areas to provide analytics and help clients understand the impact of those exposures.

He points, for example, to Marsh’s credit specialty team that can bring insights to clients on the non-traditional risks that are out there in these emerging markets and help them understand the magnitude of potential exposures.

“It is about trying to project out into the future as to what could be coming that the risk manager needs to be aware of. The traditional insurance risk is obviously always present but there are also the things the risk manager doesn’t know about. Through scenario planning and risk modelling, we can help clients identify potential flashpoints. Awareness and understanding can lead to opportunity.”

He gives a recent example: “Sri Lanka went through major political unrest a few months ago, so I went to our trade credit team and said: what country is the next Sri Lanka? Could we help our clients understand across their portfolio of countries in which they operate which ones they should be concerned about? As a result, the team came up with five issues that were present in Sri Lanka, and we can now say to clients, if these five things are present, be careful.”

This is, he says, just one example of how emerging market risk assessments can help to inform business decisions and lead to better risk management and mitigation solutions.

Beyond risk assessments, there are also various insurance solutions, such as political risk insurance, that offer protection and balance sheet stabilisation. Political risk insurance, in particular, has the ability to curb country risk premium, improve the valuation of investments in emerging markets, and enhance a company’s internal rate of return. Other examples include the use of credit insurance and surety to secure debt and release collateral, in order to improve liquidity. Understanding these possibilities to directly support corporate growth and economic objectives, while also managing risk, can create a whole new context for multinational clients to bring into their organisations’ strategic and risk management activity. “We have found this broader thinking is gaining much deeper traction across our clients today,” says Rahr.

“I think the insurance marketplace is much better positioned to help clients with these kinds of conversations than we’ve been in the past, whether that’s on the carrier side or on the Marsh side. We are building talent and capabilities around this because these are big issues that are having a major impact on our clients,” he says.

“It is about sourcing non-standard sources of information rather than continuing to go back to the same person and asking the same question,” he says. “Instead, it is thinking about who else might have a perspective for us.”

Core business insurance issues
Rahr says that when clients go into new markets, Marsh will look at the core business insurance issues: what are the pricing trends in a particular marketplace, what’s the regulation in a particular country over insurance structures, do they allow local reinsurance or foreign reinsurance, is that global programme fit for purpose for that particular country?

“If a client is going into an emerging market, what are the risks they need to think about, how is their current programme going to respond to that environment, what are the tax and regulatory implications, and pricing indications? That analysis has elements of the traditional insurance portfolio plus a number of other issues that I think our clients are finding more and more interesting given the complexity of the environment that we’re in,” he says.

Rahr concludes: “Every boardroom is trying to figure out: where do we take our money, what should we be concerned about in terms of doing business in the future, and what are the risks associated and the opportunities of moving into a new market? For us, it is about how we support risk managers and help them to play a bigger role within an organisation, by providing them with information and insight, something to be able to take to the table to be able to contribute.”

Back to top button