Chapter16 Lecture 5 Risk Management in Multinational Entities

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RISK MANAGEMENT IN MULTINATIONAL ENTITIES:

RISK MANAGEMENT IN MULTINATIONAL ENTITIES Chapter 16 Lecture 5

RISK MANAGEMENT ISSUES FOR MULTINATIONALS:

RISK MANAGEMENT ISSUES FOR MULTINATIONALS Cultural d ifferences New or d ifferent e xposures Logistical p roblems Economic i ssues Local (“ i n c ountry”) m anagement i ssues Local (“ i n c ountry”) i nsurance i ssues

EXAMPLES OF CULTURAL DIFFERENCES:

EXAMPLES OF CULTURAL DIFFERENCES Language and t ranslation d ifficulties Different l egal e nvironments Holidays and t ime d ifferences Local c ustoms Privacy l ess a “ r ight,” s o s ecurity i s a c oncern Attitudes toward p atience and r espect, e.g., ASAP, JIT

POSSIBLE NEW OR DIFFERENT EXPOSURES:

POSSIBLE NEW OR DIFFERENT EXPOSURES Potential c atastrophes Monsoons/ f loods — India, Netherlands Corruption — Russia Terrorism — U . K . War — Middle East Political r isk Confiscation and expropriation Kidnapping and ransom

POSSIBLE NEW OR DIFFERENT EXPOSURES:

POSSIBLE NEW OR DIFFERENT EXPOSURES Social u nrest Strikes Work d elays Property in t ransit Hijacking and piracy Shipping and customs delays

LOGISTICAL PROBLEMS:

LOGISTICAL PROBLEMS Availability of r isk m anager “on s ite” Computer and p hone c ompatibility and c apability Staffing Local c ompulsory i nsurance ( m ay duplicate existing coverage) Achieving u niform g lobal c overage

ECONOMIC ISSUES:

ECONOMIC ISSUES Exchange r ates (US$ contracts, hedging) Inflation Pricing in “ t ariff” c ountries “Domestic c ontent” s tatutes Tax l aws, e.g., t reatment of i nsurance r ecoveries Trade a greements, e.g., NAFTA, E U

MANAGEMENT AND INSURANCE ISSUES :

MANAGEMENT AND INSURANCE ISSUES Focus on l ocal e xposures Implementation of s afety and l oss c ontrol p rograms m ore d ifficult Admitted i nsurer r equirements ( p enalty for u se of n on- a dmitted i nsurer) More c ompulsory i nsurance c overages

MANAGEMENT AND INSURANCE ISSUES:

MANAGEMENT AND INSURANCE ISSUES Different i nsurance p ractices Contracts written more narrowly Insurers rarely provide sophisticated claim analysis Small credits for deductibles Limited coverage availability

MANAGEMENT AND INSURANCE ISSUES:

MANAGEMENT AND INSURANCE ISSUES Broker s election Expertise Local presence Value of n on- t raditional i nsurance p roducts and m arkets “Controlled master programs” Difference-in-conditions contracts (DIC)

CUMULATIVE “RISK RATINGS”:

CUMULATIVE “RISK RATINGS” The i nternational c ountry r isk g uide r isk r ating s ystem Political risk, e.g., “economic expectations vs. reality” Financial risk, e.g., “repudiation of contracts by government” Economic risk, e.g., inflation

COUNTRY RISK RATINGS:

COUNTRY RISK RATINGS Highest Risk 1— Zimbabwe 2 — Sierra Leone 3 — Serbia and Montenegro 4 — Iraq 5 — Korea, DPR 6 — Congo, Dem ocratic Rep ublic of 7 — Angola

COUNTRY RISK RATINGS:

COUNTRY RISK RATINGS Highest r isk 8 — Liberia 9 — Somalia 10 — Guinea-Bissau Lowest Risk 1 — Norway 2 — Singapore 3 — Luxembourg

COUNTRY RISK RATINGS:

COUNTRY RISK RATINGS Lowest r isk 4 — The Netherlands 5 — Finland 6 — Denmark 7 — Switzerland 8 — Ireland 9 — Brunei 10 — Sweden

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