Risk and Reward in Latin America
All businesses and investors seek growth opportunities. One of the most intriguing is Latin America, a region that recorded gross domestic product growth in the past five years second only to the emerging economies of Asia.
What we have to remember, however, is that with growth comes risk. High-growth regions such as Latin America have risks that reflect – and sometimes outpace — economic activity.
The engineer in me knows that the best way to solve a problem is to get close to it and fully understand it. This approach works well in managing risk, wherever you may find it.
So let’s look a little closer at Latin America.
Latin America’s risks should not dissuade businesses from seeking rewards in the region. As it does everywhere else in the world, risk goes hand in hand with opportunity.
With a population exceeding 600 million people and a GDP of more than $6 trillion, Latin America offers enormous potential for businesses across many industries. From construction to infrastructure to oil and gas projects, the region continues to attract billions of dollars in foreign investment.
The United Nations’ Economic Commission for Latin America and the Caribbean (ECLAC) notes that foreign direct investment in the region fell overall in 2014, however.
Foreign investment in the region in 2014 was $158.8 billion, down from a record of almost $190 billion in 2013. Investment in Brazil dropped slightly but increased sharply in Chile and Paraguay.
According to the ECLAC, while outside investment is slowing somewhat, Latin America is seeing the emergence of more trans-national companies, known as “multi-Latinas.” These are multi-national companies that trade mainly within Latin America, though some are expanding globally.
That’s an intriguing development. But as companies grow, add trading partners, bring new products and services to the marketplace, and enter Latin America, they need to consider more coordinated approaches to their property and casualty risk management.
What are some of the key risks that business face in Latin America?
Environmental risk is a concern, especially for heavy industries such as mining, energy and construction.
Professional and management liability in Latin America is an emerging but fast-growing risk in the region, too, as services have overtaken manufacturing and natural resources as the largest sector for foreign investment.
Political risk and trade credit are other risks in the region.
And let’s not forget the frequency and severity of natural catastrophes. The strongest hurricane ever in the Western Hemisphere, Patricia, struck Mexico in October this year packing maximum sustained winds of 200 mph.
Just one month earlier, Chile suffered an 8.3-magnitude earthquake that triggered a tsunami alert. Long known as one of the most seismically active locations on the planet, Chile has experienced three of the world’s most powerful quakes in the past five years, as well as the strongest quake in recorded history, a magnitude 9.5 in 1960.
Latin America’s risks should not dissuade businesses from seeking rewards in the region. As it does everywhere else in the world, risk goes hand in hand with opportunity.
Managing Risk Amid Turmoil
Multinationals and their supply chains are continuing to be challenged by political upheavals, from ISIS to Europe’s refugee crisis, to growing territorial rifts over shipping lanes in Asia.
To help risk managers better assess exposures, insurers, brokers and specialty firms are offering sophisticated tools to monitor the impact of political turmoil on various geographies and industries.
Such tools are becoming critical as an unexpected crisis can pop up virtually overnight, said Yoel Sano, head of political risk at BMI Research in London, part of Fitch Group. The research firm offers “Total Analysis,” an online platform containing the firm’s forecasts, analysis and data.
“It’s becoming increasingly clear that seemingly obscure things can emerge quite quickly as a big thing — in 2014 we saw the rise of ISIS in Iraq and Syria and also the conflict in eastern Ukraine,” Sano said. “Hardly anyone was paying attention to these events beforehand, and suddenly they were center stage. I think the overall speed of world history has increased over the past generation thanks to the internet, especially social media, and one aspect of that is a sudden increase in risk.”
Organizations seeking to build facilities or acquire companies in foreign markets are often there for the long haul and need to be fully cognizant of what they are getting into, he said.
“Investors don’t like uncertainty — they like to know what’s going to happen,” Sano said. “Sometimes uncertainty is worse than the event itself.”
BMI also analyzes how political decisions could likely affect economics and financial markets, such as the recent Trans-Pacific Partnership multinational trade agreement. Moreover, the firm also outlines alternative scenarios on risks that may not be apparent, “so that our clients are not ‘caught in the headlights.’ ”
The Hostile Environment Liability Protection (HELP) program — a consortium led by Beazley Syndicate at Lloyd’s that provides risk mitigation, crisis response and insurance for “hostile or complex environments” — recently added an “Intelligence Panel” consisting of three risk and strategic consultants firms, G4S Risk Analysis, Contest Global and Aegis Advisory.
London-based Contest Global helps clients “manage every aspect of their intelligence operations,” whether it is collecting new and hard-to-access information, analyzing data by applying the latest structured analytical techniques, or generating intelligence judgments designed to inform real-world decision-making, said Chris Mackmurdo, founding director.
For instance, this year the firm has been helping a number of banks in London come to grips with the risks presented by ISIS in Syria and Iraq, he said. A major factor is the issue of illicit oil connected with ISIS-controlled oil facilities in the region.
“There are sanctions in place that will punish anyone involved in trading or otherwise moving oil products connected with ISIS, which presents a serious challenge to banks and any company within the oil supply chain,” he said.
“The onus is on them to devise strategies to mitigate their exposure to these risks and protect themselves against any operational and reputational damage.”
Mitigation takes certain steps. Organizations must be able to collect information from multiple sources to identify any immediate or potential problem. They must also have in place a process to analyze, assess and prioritize risks based on the information available, “which will never be complete.”
They must develop risk mitigation strategies and communicate them to all stakeholders involved in implementing them, from strategic through tactical and operational personnel. Finally, they must monitor the effectiveness of their processes and strategies, refine requirements and adapt to change quickly.
The key for risk managers is being able to communicate intelligence data to decision-makers effectively, Mackmurdo said.
“You can have all the tools in the world, but unless you can influence the people making decisions, you aren’t going to change people’s minds and behaviors — so how you present the information is crucial,” he said.
Hart Brown, head of organizational resilience at HUB International, said that things often come up that clients had not anticipated prior to market entry, whether they’ve inherited operations or chose to speedily go into a market to capture market opportunity and later evaluate the risk.
While some companies are eager to take on political risks, the challenge is managing them.
“For example, in Asia, there is a concern about China … about the expansion of territorial waters that it is claiming, wanting to control certain shipping lanes throughout that region,” Brown said. “This can impact the flow of goods within a company’s supply chain, especially if there is a military buildup, which could very easily result in an accidental collision and overreaction.”
There is no one way to evaluate those risks, and in many cases, there is enough uncertainty that the analyses can be very different, Brown said. “A lot of art goes into it, along with some science.”
HUB starts by creating a risk assessment, quantifying first what a company is already experiencing within a certain market. Risks assessed include governance within that country, the business environment within that area, issues related to conflict and security, labor and economic issues within that space, and also challenges related to cyber crime.
HUB creates scorecards and dashboards to help the client understand those risks. Then it establishes the key things that clients need to monitor and include in a protective intelligence program.
“We give them analysis in a timely enough fashion to avoid potential disruption within their supply chain,” Brown said. “If we see the political climate beginning to change, clients can proactively ship material faster than they normally would.”
Visualization and analytics play increasingly important roles in such analyses, he said. HUB takes the intelligence it gathers and puts it on a supply chain map, overlaying the risks in a way that’s easy to see and “more impactful.”
The firm is also using analytics of sources including social media and news reports.
“We’re able to map out, in many cases, what’s going on and do a trend analysis, pinpointing the date and time when a disruption is going to occur,” Brown said.
Aon Risk Solutions provides clients with a global interactive map, designed to allow clients “to get a pretty good snapshot of what the world is like at this point in time,” said Roger Schwartz, New York-based senior vice president and political risk practice leader at Aon.
“Clients who have used this map may not have realized a particular country’s risks, which induced them to do more research on whether they need to get more coverage for their subordinates operating in that country,” Schwartz said.
For example, a recent snapshot of Venezuela on the map stated that the country “continues to have elevated risks in all areas, with particularly high exchange transfer, legal and regulatory risk ratings.”
“Structural issues and government mismanagement leave Venezuela very vulnerable,” according to Aon’s snapshot. “Sovereign non-payment risks have increased as lower oil output and revenue have weakened Venezuela’s cash flow and reduced its ability to pay its sizeable debts. Venezuela’s exports of crude oil have fallen in volume due to government interference and underinvestment.
“Although default on international sovereign debt is still only a risk scenario, arrears to local and global companies are rising, consistent with Venezuela’s high sovereign non-payment risk. After years of high levels of government interference, political violence and protest is rising due to food shortages. The current exchange rate mechanism is not functioning, and capital controls are hitting production.”
The interactive map also contains a variety of tools, including an “Exposure Calculator” and “Country Analysis Tour,” to compare risks in different areas, as well as a rate tracker and pricing model, to help clients determine what the costs of risks are going to be.
Aon also provides “Portfolio Manager,” a web-based tool that monitors a client’s portfolio of exposures including amortization, providing historical, current and future in-depth analysis of country, obligor and counterparty exposures.
“We are one of the very few brokers that have this in-depth tool kit, and we also work with them to determine solutions that are appropriate,” Schwartz said.
Still, “multinational corporations operating in emerging markets have access to any number of tools, and the service we provide helps them identify and manage risk, but it’s not intended to be a stand-alone service.”
The Doctor as Partner
Professionals helping employees return to work after being on disability or a leave of absence face many challenges. After all, there is a personal story behind each case and each case is unique.
In the end, the best outcome is an employee who returns to the job healthy and feeling well taken care of, while at the same time managing the associated claim costs.
Learn what most employers want from their group disability and life benefits program.
While many carriers and claims managers work toward these goals, in the end they often tend to focus on minimizing costs by aggressively managing claims to get the worker back on the job, or they “fast track” claims, approving everything and paying little attention to case management.
Aggressively managed claims can leave many employees and their doctors feeling defensive and ill-at-ease, creating an adversarial relationship that ultimately hinders return to work and results in higher direct and indirect employee benefit costs for the employer. Fast track or non-managed claims can lead to increased durations, costs and workforce productivity issues for employers.
Is it possible to provide a positive employee benefit experience while at the same time effectively managing disability and lowering an employer’s overall benefit costs?
A Unique Approach
Liberty Mutual Insurance’s approach to managing disability and absence management focuses on building consensus among all stakeholders – the disabled employee, treating physician, employer and insurer. And a key component of this process is a large team of consulting physician specialists, leading practitioners from a variety of specialties, highly regarded experts affiliated with leading medical universities across the country.
“About 16 years ago, our national medical director, Dr. Ed Crouch, proposed that if we worked with a core group of external consulting medical specialists – rather than sending most claims for Independent Medical Evaluations – we could do a better job making disabled employees and their attending physicians comfortable, and therefore true partners in producing better disability management outcomes and employee benefit experiences,” said Tim Kastrinelis, senior vice president, Distribution Partnerships at Liberty Mutual Benefits.
“In this way, our consulting physician and the attending physician are able to work with the disability case manager, the employee and the employer to deliver a coordinated, collaborative approach that facilitates a productive lifestyle and return to work.”
The result of Dr. Crouch’s initiative has produced positive results for the clients of Liberty Mutual Insurance. This consensus building approach to managing disability with consulting physician expertise has helped achieve industry leading client retention results over the past decade. In fact, 96 percent of Liberty Mutual’s group disability and group life clients renew their programs.
“By getting all stakeholders on the same page and investing heavily in consulting physician specialists, we have been able to lower claim costs and shortened claim duration for our group disability policyholders. …In the end, it’s a win-win for all.”
–Tim Kastrinelis, Senior Vice President, Distribution Partnerships, Liberty Mutual Benefits
A Collaborative Approach
In the case of complex disability medical health situations, Liberty Mutual’s disability case managers play a vital role in seeking additional expertise—an area where the industry’s standard has been to outsource the claimant for independent medical examinations.
However, Liberty Mutual empowers its disability case managers with the ultimate responsibility for the outcome of each claim. The claimant and the case manager stay together throughout the life of the claim. This relationship is the foundation for a collaborative approach that delivers a better employee benefit experience and enables the claimant to return to work sooner; which more effectively controls total disability claim and absence costs.
Sending a disabled employee with complex medical needs to an external specialist may sound like a cost-effective path, but it often comes at the cost of sacrificing the relationship and trust built between the employee and case manager. The disabled employee must explain their medical history to a new clinician, which he or she is often reluctant to do. The attending physician may be uncooperative as this move can appear to question his or her treatment plan for the employee.
As a result, the entire claims process takes on an adversarial atmosphere, building major roadblocks to the ultimate goal of helping the claimant return to a productive lifestyle.
Liberty Mutual takes a different approach. Nearly 100 physicians representing more than 30 medical specialties are available to consult with its medical and claims professionals, working side-by-side with case managers.
More than 95 percent of these consulting physicians are in active practice, and therefore up-to-date on the latest clinical best practices, treatment guidelines, therapies, medications, and programs. Most of these physicians are affiliated with leading medical universities across the country. “We recruit specialists from around the country, getting the best from such prestigious institutions as Harvard, Yale, and Duke,” said Kastrinelis.
These highly-credentialed physicians help case managers focus on providing the support needed for the disabled employee to successfully return to work as quickly as appropriate. Their collaborative work with the attending physicians provides the behind-the-scenes foundation that leads to a positive claimant experience, results in a better outcome for the claimant, and more effectively reduces total claim costs.
Coordinated Care Plan
When one of these consulting physicians reaches out to an attending physician, there’s an immediate degree of respect and high regard for his or her opinion. This helps pave the way to working together in the best interest of the employee, improving treatment plans and return to work results.
In this process, the claimant is not sent to yet another doctor; instead, the consulting specialist works with the attending physician to help fill in the gaps of knowledge or provide information that only a specialist would have. Although not an opportunity to direct care, these peer-to-peer discussions can help optimize care with the goal of helping the employee return to work.
The attending physician may have no knowledge of the challenges the employee faces in order to return to work. A return to work plan created in concert with the specialist, disability case manager, employer, and attending physician can set expectations and provide the framework for a proactive and effective return to a productive lifestyle.
“Our consulting physicians bring sophisticated medical expertise to the discussion, and help build consensus around a return-to-work plan, helping us more effectively impact a claim’s outcome and costs, and at the same time provide a better claimant experience,” said Kastrinelis.
“We can work more collaboratively with the attending physician, manage expectations, and shepherd the employee through the process much more effectively and in a much more high-touch, caring, and compassionate manner. Overall, we’re able to produce better outcomes as a result of this consensus building approach.”
“Our approach – including the use of consulting medical experts – helped us significantly reduce disability costs over two years for one large health service company,” notes Kastrinelis. “We cut average short-term disability claim durations by 4.2 days in that time, while increasing employee satisfaction with our unique disability management model and collaborative, partnership approach.
How did Liberty Mutual’s unique approach lower claim costs, reduce disability duration and improve the benefit experience for one customer?
“By getting all stakeholders on the same page and investing heavily in consulting physician specialists, we have been able to lower claim costs and shortened claim duration for our group disability policyholders,” said Kastrinelis.
“Plus, we, the employee, and the employer also get the bonus of creating a better employee benefit experience. This model has shaped our disability and absence management program to more aptly reflect our core mission of helping people live safer, more secure lives. In the end, it’s a win-win for all.”
How does Liberty Mutual provide a superior employee benefit experience?
Tim Kastrinelis can be reached at firstname.lastname@example.org. More information on Liberty Mutual’s group disability and absence management offerings can be seen at https://www.libertymutualgroup.com/business-insurance/business-insurance-coverages/employee-benefits.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.