Insuring against the risks of exporting to uncertain emerging markets can give companies the confidence to go for overseas growth, says Swiss Re Corporate Solutions
As the global economy continues to recover, more organisations are looking for new sources of growth. With markets such as Brazil, Russia, India and China – the so-called BRIC countries – now maturing, for many this means seeking new emerging markets, including Mongolia, Indonesia, Vietnam or even Myanmar.
While these locations are likely to develop as new consumers of products and services and potential export markets for UK businesses, they are also inherently risky for those looking to engage in international trade, or as places to locate manufacturing facilities or regional bases.
Political risk, when governments can change or withdraw agreements often at short notice, is a serious danger, as is the prospect of potential civil unrest, against the broader backdrop of the Arab Spring.
Protecting against these kinds of risk is essential for any business wanting to engage in such new territories and there are various options here for organisations. Expropriation cover will protect against the risk of governments taking over assets and refusing to pay for them or only paying a fraction of their true worth. And contract-related cover can mitigate against concessions or licences being unexpectedly withdrawn.
Without this kind of support there would be far less willingness on behalf of UK organisations to engage in potentially risky transactions with customers from overseas territories about which they know very little
Dividend repatriation risk is also worth considering, providing protection against changes in the tax system designed to prevent profits being taken out of the country in question. It’s also possible to get cover against political violence and the risk of assets being damaged during civil unrest, and even business interruption insurance in the event of organisations being unable to trade due to rioting or staff being unable to get to work.
Another essential issue for any business exporting to emerging markets is trade finance, where financial institutions or credit insurers effectively underwrite credit being offered to customers. This can also extend to advancing funds to exporters, covering the period between the point at which goods are manufactured and when payment is due from the customer. Such a facility not only provides assurance that the supplier will be paid, but can also ensure exporters are in a position to finance the order itself, and pay their own workers and suppliers, minimising cash-flow concerns.
Insurance companies, such as Swiss Re Corporate Solutions, play a vital role here in underwriting the risks being taken by banks and corporates engaging in international trade. With UK and European banks restricting their exposure to such risk and new regulations specifying greater proportions of capital needing to be retained by financial institutions, the use of insurance companies to underpin such transactions – dealing only with approved emerging market institutions – is only likely to increase, alongside providing services direct to customers themselves.
Without this kind of support there would be far less willingness on behalf of UK organisations to engage in potentially risky transactions with customers from overseas territories about which they know very little. Almost every export deal to emerging markets has some form of trade finance attached to it and, over the past few years, governments and the G20 have been keen to push this as a means of encouraging and facilitating international trade.
With the power of the internet and an evermore connected world, more small and medium-sized organisations are also engaging in global trade compared to a few years ago, and having protection against political and credit risk can give these organisations the confidence to enter into potentially lucrative, but risky markets, along with larger competitors.
With global economic growth picking up, organisations intending to engage in international trade and take advantage of new sources of revenue, simply cannot afford to ignore the so-called “frontier” economies. But neither can they enter these without the confidence that, should risk become reality, they will be able to survive and live to fight another day.