Weak economy and catastrophe concerns – Portugal

Portuguese companies are dealing with the effects of an economic environment in which austerity measures and high unemployment have combined to depress consumption. At the same time, the lack of a catastrophe insurance pool is a permanent source of worry for risk managers in a country that has previously been devastated by an earthquake and tsunami. Also, general discontentment among the Portuguese only increases the risk of terrorism and other social turmoil, the risk managers pointed out.hideBut with the Portuguese economy having struggled for several years in a row, at least many risk managers in the country are now used to operating in these difficult conditions. “There have not been many changes compared to last year,” said José Luis Amorim, Director of Risk Management at Sonae, the business group active in sectors such as retail, telecommunications and insurance. “We are all still in crisis mode, especially companies like ours that are dependent on Iberian markets. And there is a new word that we have to listen to every day now which is ‘austerity’, and which nobody had even heard of about five years ago,” he said. Mr Amorim added: “For us the most important risks are those linked to external economic conditions. The macroeconomic situation is having very important effects on our business. And even though we have taken action and much creativity has been employed in the effort to mitigate the effects of the poor economy, it is very difficult to begin to answer all the challenges.” He pointed out that unemployment is rising very quickly in Portugal and Spain and that the situation is even worse where the young are concerned. “It affects very strongly the purchasing power of people and especially of young consumers who are consuming less than young people used to do in the past,” Mr Amorim said. “We are living in an environment with big economic and social difficulties. It is only natural that top managers of our firms are mostly concerned about such issues nowadays, mainly because we work with a kind of infrastructure that is vital to the Portuguese economy,” agreed Pedro Nazaré, Head of Risk Management at Refer, Portugal’s rail firm. The economic conditions are not only affecting consumption. They are also making it difficult for companies to raise money to fund their activities. This is another issue that keeps many a CEO up at night in Portugal. “The financial side is an important concern for us,” Mr Nazaré said. “The infrastructure that we manage requires constant investments in maintenance, and resources have become increasingly scarce.” This situation is not unique to Mr Nazaré’s firm. “The availability of capital is another risk that we already faced in 2012, and it has turned ever more important,” Mr Amorim agreed. “The state has had to pump a lot of money into the financial system, particularly in Spain but also in Portugal. Banks say that they are healthier today than in the past but they are still not lending to companies and the economic depression means that there are not many takers of loans either.” Another effect of the crisis is a spike in social discontentment, which creates its own set of problems. “With the increase of social pressures in the country terrorism has surely climbed in the list of my concerns,” Mr Nazaré said. A terror attack or some other catastrophic event could in fact cause huge disruption for Portuguese companies because the country lacks a catastrophe pool to help the insurance market face up to potential losses. Mr Nazaré said it is more than time for the country to look for solutions to this problem. “It takes time to build up a catastrophe pool, but in any case it is necessary to begin building up the funds,” he said. “It has not started yet, however I think that we should move in that direction.” Lisbon and other parts of Portugal were destroyed by an earthquake and tsunami in the 18th century, so it is not surprising that catastrophe risks are a concern for many firms in the country. It is certainly a worry for EDP, the energy group, according to its Director of Insurable Risks, Demetrio Tahoces. “Most of our assets are based in Portugal and our operations are very much concentrated, so we are concerned about catastrophe risks, especially earthquakes,” he said. “But there are other risks too. For example, the tropical storms that have hit Portugal in recent years and have the potential to affect our distribution lines.” In addition, risk managers have to deal with the operational risks that are specific to their lines of business and which can have a huge impact on their companies’ bottom line. “Another risk that is linked to the concentration of our business units is the risk that a boiler explodes in one of our big coal plants,” Mr Tahoces mentioned as an example. “In such a case, losses could be big, both in terms of property damage and a loss of profits." And then there are the new risks that companies have to face as they look for new sources of growth. “We have been developing offshore activities off the Scottish coast, where we have two projects going on,” Mr Tahoces said. “We have been investing considerable amounts of money in a field where we still have limited experience.” Mr Amorim noted there are many risks that cause a common concern for the risk management department and CEO of his company. But there are some nuances between the way risk managers and top bosses deal with some of these threats. “There is not much difference between what we at the risk management function and our CEO think, but there certainly is a difference of approach to risks,” Mr Amorim said. “We do not have only one business, we have several of them. For us the main focus is our most important business, which is retail. Our CEO is more concerned about the group as a whole and about risks like the quality of our human resources.” In this case the financial crisis in Portugal has added yet further problems. “One of the main worries of our CEO is to hire and keep quality staff,” Mr Amorim said. “This is a problematic area as people are not finding opportunities in Portugal today and, as a result, they are emigrating to other countries. It is a challenge that we have to face in our local markets, and an even more significant one when we are making an effort to increasingly internationalise our activities. We have to attract and retain talent here in Portugal and abroad too.”

Weak economy and catastrophe concerns – Portugal

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