Multinational Risk

Stop Tariffs from Decimating Your Supply Chain with These 3 Insurance Products

Risk managers should assess how global protectionism will impact their supply chain.
By: | July 11, 2018 • 7 min read

Writer, historian and philosopher Voltaire once quipped, “Uncertainty is an uncomfortable position. But certainty is an absurd one.”

Though Voltaire lived and wrote during the Enlightenment period, he very well could have been reflecting on today’s international political risk climate. Uncertainty, it seems, can be added to the very small list of life’s “sure things” — right next to death and taxes.

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For multinational businesses, today’s uncertainty is, in part, a result of the growing trend toward trade protectionism both in the United States and abroad. Trade protection is the drive to limit imports or promote exports by creating barriers to trade (such as tariffs) with foreign nations. The Trump administration and nationalist government actors abroad have increased the focus on trade protection.

“We live in interesting times,” said Richard Abizaid, XL Catlin’s head of the Americas for political risk, credit and bond.

“Contrast this era to the post-World War II era where the liberal world order was the dominant political and economic system with the United States at its head. It created an atmosphere of predictability and allowed businesses to operate globally based on the assumption that the rules of the game were known to all,” he said.

Today, economic protectionism is creating a climate of increased instability, which is a shift from the years of predictability, said Abizaid.

The Trump administration’s unraveling of the Trans-Pacific Partnership, its efforts to renegotiate the North American Free Trade Agreement and the push to renegotiate the free trade agreement between the U.S. and South Korea are a few examples of how trade protectionism is playing out on the world stage.

Experts predict this is only the first act.

Richard Abizaid, head of the Americas for political risk, credit and bond, XL Catlin

President Donald Trump campaigned for the presidency on this issue, among other things, and appears to be committed to following through on this promise. But whether the current course is a long-term shift toward nationalism or simply a Trump strategy used to create a better negotiating climate for the U.S. remains to be seen.

Either way, with a president characterized as impulsive, sometimes hostile and often lacking prudence, even a well-planned strategy could go awry, thus adding to the uncertainty and risk.

“The President seems to be throwing some of this out there to get the attention of other nations, so he can start renegotiating some of the deals he sees as unfavorable to the U.S.,” said a brokerage executive who specializes in global political risk.

“He has made some exceptions, such as those for Canada and South Korea, so maybe he’ll make an exception for some of the other countries or industries as well. Trade wars are a concern on business leaders’ minds, and no one wants to see this escalate and get out of control,” he added.

At Risk & Insurance® print time, the Trump administration, on May 1, delayed for 30 days the imposition of tariffs on steel and aluminum for Mexico, Canada and the European Union. The move was met with both anger from allies who want more than a short-term fix and a collective sigh of relief from those who feared tariffs would spark retaliation.

But relief is temporary, because this issue is far from resolved. Financial and other business consequences could yet be costly to industry and consumers alike.

Supply Chain Tariff Risks

“There are different scenarios that could take place that would be detrimental to business,” said the executive. Among them are tariffs (paid on a class of imports or exports).

“Tariffs add cost to the supply chain. This could impact costs by raising the prices of goods associated with the supply chain,” he added.

Evan Freely, global practice leader credit specialties, Marsh

“Businesses would need to reassess their costs. If their margins are still good they probably won’t do anything. But if they have higher costs — so high that the project is no longer valuable, then they will need to act. This is a tough one to bring to the insurance market,” the executive said.

Evan Freely, global practice leader credit specialties, Marsh, noted when tariffs increase companies’ costs and subsequently affect market price for their products, consumers shoulder the burden.
“This is when the pain is passed on to the consumer,” Freely said.

“U.S. companies hit by retaliatory tariffs could see a loss of jobs and a loss of market share. Certain agricultural companies, for example, also are at risk.”

Trade Barrier Risk

In addition to tariffs, an escalation of other international trade barriers has multinational businesses concerned. For example, if the situation between the U.S. and China results in either government limiting or prohibiting selling to or importing from the other country, businesses could be without needed manufacturing materials thus negatively affecting the supply chain.

There is concern that China, in particular, could react to policies of the U.S. government by using “back-door methods” to make business more difficult for U.S. companies.

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“Companies with investments in China could be targeted for retaliation by the Chinese government,” said Abizaid.

“And for us, the potential credit degradation of companies impacted by potential and unknown retaliatory Chinese tariffs is a source of concern.”

Worldwide political and economic influence is also at stake.

“The plot thickens when you think of China’s growth,” said Abizaid.

“China’s exports to Asia have doubled, while U.S. exports have declined by half over the last 10 years. This gives China significant influence not only in the Asia region but worldwide. China has been very determined and active in increasing its international influence and trying to establish itself as a global leader. The Chinese government reach extends well beyond just Asia and trade.”

Risk Management Strategies

Despite this uncertainty, there are things risk managers can do to mitigate risk caused by protectionism.

Among these strategies is diversifying your supply chain. If a company’s supplier is located in a region that is vulnerable to unrest, tariffs, trade barriers or acts of war, it could result in the supplier being unable to deliver its product or make the product cost-prohibitive.

So instead of ordering all supplies from one factory, savvy risk managers are recommending a diversification of suppliers — simply put, ordering from several strategically located suppliers.

“It’s all about being agile,” Freely said. “The more progressive companies are agile and seek multiple suppliers in more regions or countries.”

Even with diversification of suppliers, risks still ensue. Companies, which have vetted suppliers, still can’t fully know the risks that exist to their suppliers’ suppliers.

Additionally, the political climate worldwide is such that a region stable today could very quickly become a region of unrest, thereby rendering suppliers unable to deliver.

Three Political Risk Insurance Products

“A big part of our job is educating risk managers on the potential impact on their business of an unpredictable geopolitical environment and how political risk insurance products can provide some balance sheet protection,” said Abizaid.

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“Risk managers know a lot; they have a great depth of knowledge. They will come to us having identified where their company is exposed to political risks and say here is the situation, and we work with them and their brokers to structure a political risk insurance program to help meet their needs.”

Those recommendations, among other things, include political risk insurance products. Some are standard, while others can be manuscripted to deal with very specific situations. They include:

  1. Trade disruption insurance: This product can help protect a company’s income in the event their supply chain is disrupted due to political risks such as war, embargos and government actions that restrict exports.
  2. Contract frustration insurance: If a multinational business has a contract with a government buyer and is concerned that it may not get paid due to credit concerns of the buyer or the political risks posed by doing business in an emerging market country, contract frustration can be used to protect a company’s account receivables.
  3. Expropriation: This product covers government interference with a company’s investment. Key here is its ability to cover more subtle actions such as political retaliation from a foreign government that denies the ability of the company to continue to operate.

For example, this could include the cancellation of licenses which are critical to continue running its business or the implementation of excessive taxes or tariffs that no longer make the business economically viable.

Geopolitical Results Of Protectionism

Even with strategic planning, diversification and insurance coverage, the consequences of trade protectionism for the U.S. and multinational U.S. business might not be worth any gains made.

“If the U.S. pulls out of some of our agreements, it will almost guarantee China’s growing influence at our expense,” said Abizaid.

“The U.S. used to consider trade as an extension of our geopolitical influence. The U.S. government was a guarantor of democracy around the world,” he added.

Given this, and the damage to relationships with our long-term allies, such as Britain, perhaps it is time for the U.S. government to consider less the “price” of things and focus more on their “value.” &

Mercedes Ott is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.

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But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.

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Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]