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Growth in Latin America Will Come From Managing Risks

Joe Tocco, XL Catlin

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Emerging economies are attractive places for business and investors because of their growth potential. For the past several years, one of the fastest-growing regions has been Latin America. Its gross domestic product growth since 2010 has been surpassed only by the emerging economies of Asia.

Where there is growth – in industry, infrastructure, population, productivity and other measures – there also is risk. That is important to remember, because without managing risk, long-term growth and value creation are impossible to achieve. Latin America’s recent steady growth has begun to slow down, but the opportunities throughout the region remain numerous for those businesses and investors willing to accept the risks.

Why do business across many industries like the prospects in Latin America? Let’s consider a few facts:

  1. The region’s population exceeds 600 million people.
  2. Latin American countries’ combined GDP is more than $6 trillion.
  3. Construction, infrastructure, oil and gas, and other projects are attracting billions of dollars in foreign investment.

According to The United Nations’ Economic Commission for Latin America and the Caribbean (ECLAC), foreign direct investment in 2014 fell, but it decreased only slightly in countries such as Brazil. In Chile, for instance, investment spiked. The United Nations reported that foreign investment in the region in 2014 was $158.8 billion, down from a record of nearly $190 billion the year before.

ECLAC points out that, while outside investment is slowing, Latin America is seeing an increase in transnational companies, known as “multilatinas.” These are multinational companies that trade mainly within Latin America. The activities that growing companies such as these engage in -- adding trading partners, bringing new products and services to the marketplace, and entering new markets – call for coordinated property and casualty risk management.

In a region as large and dynamic as Latin America, global insurance programs can make a lot of sense. One of the great advantages of global programs is their ability to coordinate coverages and comply with requirements in jurisdictions whose laws and cultures may differ vastly from each other. Even when not using a global program for cross-border risks, it’s important to have an experienced risk management partner, with a presence in the regions where you do business, that can help navigate the complexities of different markets.

 

 

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In a region as large and dynamic as Latin America, global insurance programs can make a lot of sense.

 

Latin America is a region with lots of complexity. What are some of the key risks that businesses face there? Environmental risk is a growing concern, especially for the mining, energy and construction industries, which are core industries across Latin America. Professional and management liability is an emerging but fast-growing exposure in the region, too. Services have overtaken manufacturing and natural resources as the largest sector for foreign investment, accord to ECLAC.

Political risk and trade credit are also present in Latin America. For example, Argentina is the third largest economy in Latin America and the second largest in South America, right behind Brazil. And political and economic change is continuously happening that could impact business opportunities, operations, financial operation or even result in, as demonstrated in the past, the seizure of assets . In 2012, for example, then-President Cristina Fernández de Kirchner announced the nationalization of YPF, an oil company owned by Spain’s Repsol. More recently, however, the country elected its new president, Mauricio Macri. His election mantra was “Let’s Change.” Having taken office this month, he has wasted no time making changes including lifting restrictions on currency exchange, imports, and exports. His changes removed export taxes on soy and other major agricultural exports as well as foreign exchange controls that he believes hampered trade and financial transactions. He’s striving to boost foreign investment to lift the Argentine economy. In fact, YPF recently made a joint announcement with Dow Argentina, the local unit of Dow Chemical Co., that they will invest $500 million in 2016 to explore for shale gas. This is the first major foreign investment announcement under the new administration. While more is expected, changes in Argentina illustrate how quickly political and economic situations can change.

Also consider the frequency and severity of natural catastrophes in Latin America and the risks they pose. 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 in September 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 also has given us Spanish terms for atmospheric phenomena that can influence natural disasters. The effect known as El Niño (Spanish for “little boy”) increases the risk of wildfires in Central and South America, while La Niña (Spanish for “little girl”) typically creates wetter conditions. These effects can worsen the risks of fire, flood and windstorms.

Risks in Latin America should not discourage businesses from seeking growth opportunities in the region. As occurs everywhere else in the world, risk in Latin America accompanies opportunity. My experience in engineering suggests that the best way to solve a problem is to get closer to fully understand it. This approach works well in managing risk, wherever and whatever that risk happens to be.

About the Author
Joseph Tocco is chief executive, Americas, at XL Catlin. He has held various senior executive roles in property and casualty insurance during his career and is a veteran of the U.S. Navy, where he served as a nuclear field service engineer.

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