A Rational Approach to Emerging Markets Risks

Risk Management, April 2005 | Go to article overview
Save to active project

A Rational Approach to Emerging Markets Risks

The developing economies are truly an alluring place in which to do business. Advances in technology, especially in communications and transportation, have connected businesses with additional sources of labor, importers with exporters and fueled the accumulation of capital in many countries of the developing world. These emerging markets are now doubling their gross domestic product (GDP) roughly every 12 years.

While this growth offers exalting opportunities, it is hard to deny the concurrent risks. Transitional economies can slip into an environment prone to the imposition of currency controls that restrict businesses from converting local currency into hard currency and repatriating converted currency. Of equal concern is the gradual infringement upon trade or investment rights that can result in creeping expropriation of a project, or even the threat of political violence.

Businesses seeking the higher growth opportunities of developing economies may be faced with a set of additional risks that go beyond traditional commercial exposures--risks that may expose a company's balance sheet to catastrophic shocks.

But with a rational approach to risk management that utilizes insurance, companies can protect themselves against the exposures found in emerging markets. Insurance products are highly effective mechanisms that can protect an organization from the risks of expropriation, political violence and inconvertibility, as well as payment defaults caused by financial reasons specific to a local company.

Private-public alliances

Recently, the effectiveness of insurance products has been strengthened by collaboration between private insurers and public agencies. Initially, private insurers brought much-needed capacity to a marketplace where growing demand exceeded coverage for infrastructure projects. Today, changing market demands have prompted stronger cooperation between the public and private sectors.

What was once a rarity--coinsurance and reinsurance arrangements between public and private insurers--is now a paradigm for the market. An added advantage to insureds is the collective diplomacy and clout that these private-public collaborations provide.

A case in point is the 2002 currency crisis in Argentina. There, the Berne Union (an international union of private and public insurers) gained exemptions from Argentinean exchange controls that would have prevented businesses from converting local currency and transferring it to investors or lenders outside the country. More recently, Zurich was instrumental in gaining exceptions to Venezuelan exchange controls for its insureds. Admittedly, the insurers averted losses. But more important, payments from insured companies continued uninterrupted.

Public-private alliances provide enormous benefits to insureds that go beyond their diplomatic missions. Long term, they have bolstered the underwriting process and improved product delivery. Public agencies frequently possess much-prized historical experience, local intelligence and clout that, when added to the private insurers' technical ability, innovation and responsiveness, aids in structuring political risk products that meet the specific needs of investors, exporters or lenders.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

A Rational Approach to Emerging Markets Risks


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?