Articles of Interest

Keeping You Informed

MULTINATIONAL CUSTOMER NEEDS 
CPCU Society, International Insurance Quarterly, May 2005 - What you as a multinational company should demand of your insurance broker; what you as insurance broker should offer your multinational customers.

POLITICAL RISKS GIVE MANAGERS 'THE CREEPS' 
Risk & Insurance, February 1, 2005 - In emerging markets, political risks are the source of creeping expropriation, as citizens who own local firms are often charged with regulating the companies as well.

GLOBAL AGING 
Business Week, January 31, 2005 - It's not just Europe -- China and other emerging-market economies are aging fast, too. There are solutions, but it's time to act.

PROTECTING OVERSEAS EMPLOYEES 
Risk Management Magazine, November 2004 - Many employees working and traveling in troubled regions are still not adequately protected, and both employee and employer are often unaware of the grave peril they face.

TERRORISM:  LIVING WITH RISK 
Treasury & Risk Management, September 2004 - With daily warnings of another, perhaps more deadly, attack in the offing, companies are reassessing the risks they face

SHARP DECLINE IN EXPAT ASSIGNMENTS 
Employee Benefit News, June 15, 2004 - U.S. companies are slashing the length of overseas assignments and doing more to ensure their expatriates are happy and productive on the job.

THE O-RING IN YOUR SUPPLY CHAIN
CFO.com March 11, 2004 - Whether political perils arise far afield or close to home, the consequences for your supply chain can be catastrophic. Here's how finance executives can manage the risk.

EMERGING MARKETS 
Business Insurance, February 16, 2004 - As insurers and brokers try to seize growth opportunities in emerging markets, the growth potential of China and India is most impressive to insurers and brokers.

WHO IS WINNING CONTRACTS IN IRAQ AND AFGHANISTAN? 
AME Info, March 2, 2004 - The reconstruction of Afghanistan and Iraq is a multi-billion dollar business. A profile of the companies that are cashing in.

IN PURSUIT OF THE DEAL, IRAQI STYLE 
The Washington Times, February 22, 2004 - Doing business in Iraq takes hefty flak jackets and armed guards. It also takes guts and knowledge, family ties, good connections and a lot of money.

U.S. JOBS JUMPING SHIP
CNN Money, May 2, 2003 - U.S. employers in a wide range of industries move more and more jobs overseas.

U.S. FINANCIAL SERVICES FIRMS TO MOVE MORE THAN 500,000 JOBS OVERSEAS
A.T. Kearney, May 1, 2003 - US Financial services companies are expected to shift up to 8% of their total workforce overseas in the next five years, anticipating total annual savings of $30 billion.  Benefits brokers with a global capability will be in high demand to serve and support their growing foreign operations.

THE NEW GLOBAL JOB SHIFT
Business Week, February 3, 2003 - The next round of globalization is sending upscale jobs offshore. They include basic research, chip design, engineering--even financial analysis.  This trend highlights the need for a global capability to support your growth-oriented client's insurance and employee benefits needs.

CREATED TO LEAD
Fireman's Fund McGee Marine Underwriters pursues market leadership with agility, focus and expertise

WHY POLITICAL RISK?
Eight tips on how to deal with it"

YOU'VE LOST THAT LOVING FEELING
Treasurers are increasingly fed up with--and fleeing--
the large insurance brokerage firms.

SMALL IS BIG AGAIN
Today the regional brokers are putting up a fair fight for business. Take a look at what the little guys bring to the table. They just might be the service providers you were looking for.

CREATED TO LEAD

Fireman's Fund McGee Marine Underwriters pursues market leadership with agility, focus and expertise

By Elisabeth Boone, CPCU

"Created to lead" is an ideal description of the powerhouse created by the combination of marine underwriting manager Wm. H. McGee & Co. with Fireman's Fund Insurance Company and its marine division. Representing a combined total of some 250 years of experience in the challenging marine insurance market, and backed by the resources of global giant Allianz, Fireman's Fund McGee Marine Underwriters (FFMMU) has its sights firmly set on achieving a leadership position in its chosen markets. To learn why these two premier players chose to join forces, and how they're leveraging their strengths to meet customer needs, we'll talk with three top executives of the newly formed entity: Arthur E. Moossmann, Jr., a respected marine insurance industry veteran who came on board last year as president and chief executive officer; Michael J. Miller, who serves as executive vice president and chief operating officer after a 27-year career with Wm. H. McGee & Co.; and Joseph P. Maher, Jr., who brings 28 years of experience with Fireman's Fund to his current position of senior vice president and chief marketing officer. 

Going for growth

What factors motivated Fireman's Fund and McGee to consider a combination? "Each company has quite a long history--more than 100 years in the marine business--and it's safe to say we both had probably reached a plateau," Mike Miller responds. "Fireman's Fund was looking for ways to grow its marine insurance operation, and McGee, as an underwriting manager, recognized the advantages of being aligned with a parent that had shown a very strong commitment to the marine business. The books of business complemented one another, so there was no need for a dramatic shift in underwriting approach, which would mean a loss of business." Another motivation, he notes, was the cost savings that could be achieved by bringing McGee into the Fireman's Fund infrastructure. "The fit was a natural for Fireman's Fund and its parent, Allianz, because of their stated intention to become one of the top five markets in each of their chosen lines of business," Miller adds. "The combined organization also allows for the establishment of brand recognition in the marine market." 

With $320 million plus in gross written premium, FFMMU ranks as the sixth leading writer in the commercial marine insurance market, comprised of ocean marine, inland marine and related property. "We believe we're the number one ocean cargo market in the United States," Joe Maher explains, "and in overall ocean marine we probably rank about fifth because our hull and P&I (protection and indemnity) writings aren't yet at the same level as our ocean cargo book."

"Our overall vision is to be the leading provider of marine- and inland marine-related products by 2004, measured in terms of both consistency of profit as well as market share." 

--Art Moossman

President and Chief Executive Officer Art Moossmann views New York Harbor, one of the world's leading ports for the oceangoing vessels and related risks insured by Fireman's Fund McGee Marine Underwriters.

Combining forces

Merging two organizations with distinct identities, cultures and traditions is no easy task and creating an efficient operating structure for McGee and Fireman's Fund certainly presented a number of strategic challenges. Art Moossmann explains: "When examining the two operating cultures of Fireman's Fund and McGee when they were functioning independently, I think it's fair to say that McGee had a fairly centralized decision-making philosophy. It had a network of branches; however, most major decisions were made at its home office, located in New York City." In contrast, he continues, "Fireman's Fund had a much more decentralized operating philosophy, wherein underwriting authority and decision-making authority resided in the field offices. In bringing the two organizations together, there was somewhat of a cultural conflict."

How was this difference resolved? "The strategic direction we agreed on was that, because of the size of the combined company, it made sense on several fronts to pursue a decentralized decision-making structure," Moossmann responds. "Given the geographic breadth of the United States, with 24 field offices we felt more confident that underwriters who knew their local territory were in a better position to understand the unique requirements of their customers and producers. We use a highly decentralized decision-making model that operates through a network of regional and branch-managed delivery points." To promote consistency, Moossmann adds, "We have line of business executives in our home office who ensure that we're performing effectively in each of the various subclasses of inland and ocean marine underwriting."

In a bold departure from tradition in the marine insurance market, FFMMU chose to place both its ocean marine and inland marine business under a single management team. "In most companies these lines of business are managed separately, so one way we distinguish ourselves is by combining them in one profit center," Moossmann explains. "We see this as a competitive advantage because it gives our agency force single point-of-sale and decision-making access."

How are customers and producers responding to the new organizational structure? "I think we've made significant progress in integrating the two entities into a decentralized operation," Joe Maher says. "Not only our employees but, equally as important, our customers and the independent brokers and agents who distribute our products see the advantages of working with us under the new structure, so we feel good about the fact that it's being accepted and that we're moving forward."

Mike Miller, executive vice president and chief operating officer, brings 27 years of experience with Wm. H. McGee & Co. to Fireman's Fund McGee Marine Underwriters.

Dedicated to shared values

Corporate mission statements often tend to be lofty declarations of ideals that look great on paper but that may be difficult to achieve in the real world. Not so at FFMMU, whose mission and operating philosophy are clearly articulated, practical and diligently pursued in the day-to-day business routine. "Certainly being a unit of Allianz worldwide and, in the United States, being part of Fireman's Fund, our mission and operating philosophy dovetail very closely with theirs," Moossmann explains. "We're guided by a value-based system for our employees, customers and producer business partners that addresses how we want to be perceived and what we are committed to delivering in the marketplace." [The sidebar at the top of the page outlines the nine Shared Values that drive the organization's decision-making process.] He continues, "Our overall vision is to be the leading provider of marine- and inland marine-related products by 2004, measured in terms of both consistency of profit as well as market share."

Underwriting stability

As with its mission and values, the underwriting philosophy of FFMMU tracks closely with those of its parent organizations, Mike Miller explains. "Consistent with Allianz's and Fireman's Fund's philosophy, we want to be positioned as one of the top five providers in each of our chosen market segments," he says. "In those market segments, we want to achieve a consistent profitable return and be a stable force in the marketplace rather than a flash in the pan." How does this commitment translate into day-to-day underwriting activities? "To promote stability, we continually seek to build our expertise in areas that support our underwriting efforts, like claims technology and data management. This will allow us to distinguish ourselves from our competitors," he responds.

Senior Vice President and Chief Marketing Officer Joe Maher, a 28-year veteran of Fireman's Fund, is excited about Fireman's Fund McGee's aggressive, innovative and directed marketing approach.

"Directed" marketing philosophy

How does FFMMU seek to position itself in the challenging marine insurance marketplace, where it encounters competition from both specialty underwriters and generalists that tend to move in and out as market conditions change? "Overall, our marketing philosophy is to grow aggressively and profitably using an approach that leverages our marine expertise and the financial strength of Allianz and Fireman's Fund," Joe Maher responds. "A good way to describe our marketing philosophy is 'directed': directed at the marine insurance customer. We have professional marine underwriters and claims specialists whose only job is to focus on the marine customer. We know our customers' business, and we continually strive to meet their needs in responsive and innovative ways. To sum up, I'd characterize our marketing approach as aggressive, innovative and directed."

Within its marine insurance specialty, FFMMU offers a broad array of products. On the ocean marine side the company writes cargo risks; target prospects include importers, exporters, distributors, freight forwarders, manufacturers and suppliers and retailers and traders. Additional ocean marine coverages available are hull, P&I, yachts and other marine liabilities, including charterers, wharfingers, stevedores, marina operators and marine terminal operators. In inland marine, FFMMU writes approximately 250 classes of business; target risks include construction, technology and transportation. The third major segment of the company's business is marine-related property risks.

A key advantage for FFMMU, Art Moossmann points out, is inherent in its role as a specialist. "One of the benefits of marine insurance in general, and certainly one of the linchpins of our operation, is the flexibility of being able to identify an individual customer's commercial risk transfer needs and tailor coverages to address those needs," he comments. "In most instances there are no standardized, one-size-fits-all forms that are offered to the customer on a take it or leave it basis. This flexibility allows our experts to work with the producer and the customer to put together a program that achieves a win-win for all parties."

Brokers and agents are key

In this era of insurer consolidation, brokers and agents across the country are experiencing the loss of markets as well as being subjected to an array of other pressures from their remaining carriers. In this environment, how does the newly integrated Fireman's Fund McGee Marine Underwriters view its relationship with independent producers? "As a result of the acquisition, our combined producer force across the country totals about 2,500," Joe Maher responds. "They range in size from the national brokers to small retail operations. We look for producers who can deliver the kinds of business we seek, and who need a stable market, staffed by marine professionals. And, as Art mentioned, we like producers who don't want a cookie cutter approach, but who value our ability to tailor select coverages for their customers."

Marine insurance is a highly specialized field where the casual player may not feel comfortable. "We tend to go to producers who have marine expertise, but we believe we also can provide solutions to producers who have marine customers with specific needs, and we encourage those producers to come forward," Maher says. "Obviously we can't write just one small account for a producer; we'd like to have a flow of business over time and develop a profitable relationship that accrues to the benefit of all parties: the customer, the producer, and Fireman's Fund McGee."

With its network of U.S. branch offices and the global reach of Allianz, with offices in 58 countries, Maher says, "Our ability to deliver worldwide coverage from a local platform is unique in the U.S. marketplace. In addition to carefully crafted products, we provide national advertising, local claims and loss control expertise and virtually as much capacity as is available in the industry." What's more, he adds, "We offer competitive pricing and a very attractive compensation package that rewards producers who give us the type of business we're seeking."

At a time when many insurers are pursuing alternative distribution channels, FFMMU remains firmly committed to independent agents and brokers. "We distribute our products exclusively through independent agencies, which range from small storefront operations to very large producers like Marsh and Aon," Art Moossmann says. "Our goal is to be one of the top three markets of choice in each of the agencies we do business with."

E-commerce initiatives

Like most insurers, FFMMU is exploring ways to use the Internet to the best advantage of its customers, producers and employees. It's one of the first marine insurers to issue certificates of insurance to its ocean cargo customers via the Web. Plans are in the works to expand the company's use of the Internet to communicate with producers, provide sales support and speed transaction processing. "We're planning to put virtually all of our brochure and policy information on the Web, so our agents can find out in seconds what kinds of coverages we offer for a particular client and also view a checklist of related coverages that a client might need," Maher explains. "Eventually we want to have all of our applications online, as well as claims and loss information. We're also exploring the idea of providing links on our site to marine service providers, such as container distributors and logisticians who plan ocean trips. In turn, these providers would have a link to us on their Web site so their customers could contact us for information about marine insurance."

Innovative use of the Internet is part of a broader strategy FFMMU is pursuing, Moossmann emphasizes. "We're looking at the Web and e-commerce as more than just a means of issuing policies and providing access to information," he says. "Our objective is to really add value to what we offer the marine insurance customer. To do that, we're working to understand our customers' needs and deliver meaningful products and services."

Market trends and outlook

Like virtually every other line of property/casualty insurance, the marine insurance marketplace has endured a long siege of intense competition, depressed rates and less than satisfactory results. What's ahead in this complex market, and how will Fireman's Fund McGee Marine Underwriters respond to emerging trends?

"Across all marine lines, we're seeing a firming market," Mike Miller responds. "It's not a hard market, in the sense that there's a lack of capacity or players; we still see plenty of capacity and companies that are willing to write the better accounts in each market segment. Our expectations are that the price firming we've seen in the past six months will continue into 2001." Historically, the marine market has been characterized by the entry and exit of carriers that are drawn to the market when it's performing well and tend to leave when results deteriorate. "When these companies get into the business up to their necks, they reassess their reasons for getting involved and often realize they don't have the commitment or the resources to stay the course," Miller explains.

Overall, rate increases for marine insurance are approaching 10%; he notes, however, "I don't believe this is enough. Over the past three to five years, we've seen significant deterioration in rates and deductibles as well as broadening of coverages. The effects of these changes have shown up in poor underwriting results reported. I don't believe the current rate increases are in line with the exposures that are being presented." Miller cites additional factors that are affecting the marine market. "In the last three to five years we've also seen consolidation on the company side, which has increased the pressure to write business," he comments. Further, "Inexpensive reinsurance has fueled growth in volume without maintaining underwriting discipline."

What challenges lie ahead for Fireman's Fund McGee in this volatile marketplace? "To be a leader in the marine segment, we'll need to demonstrate consistently to our customers that we're committed to understanding their needs and delivering products and services that are meaningful to them," Miller responds. "We'll also need to leverage our expertise and competency in a way that will allow us to achieve profitable growth while at the same time bringing down insurance costs. This will involve improving the efficiency of our loss control efforts and claims service." What's more, he adds, "Technology needs to become a competitive advantage in serving the marine insurance customer. Finally, if our company is to be successful, the face it shows to the market must convey a sense of urgency and the drive to be number one."

As Fireman's Fund McGee Marine Underwriters moves ahead, Art Moossmann says it will pursue strategies for advancement in several key areas, all directed at achieving profitable growth while controlling expenses, especially those that are passed on to the customer. One such strategy is product expansion: "We'll be moving into the excess marine liability field, and we're currently putting together the infrastructure for that initiative. Second, we'll continue to pursue a prudent acquisition strategy, in line with the value Allianz and Fireman's Fund place on the marine insurance business. Third, we'll continue with our technology initiatives, trying to provide the kind of user-friendly environment to producers and customers that will make us the company of choice to do business with." Finally, Moossmann says, "We'll continue to motivate and challenge our staff to stay abreast and ahead of the market in terms of their underwriting and claims handling knowledge, because at the end of the day, it really comes down to who has the best players. We're committed through our value-based statement to motivate and reward leadership and top performance. Quality people are the foundation of our future."

As a newcomer to Fireman's Fund McGee, Moossmann comments, he's impressed with the caliber of its staff. "Our people are passionate about what they do. They're dedicated, they're professional, and they're highly motivated to do the job for us. I'm pleased to be on board-I'll tell you, there's no place I'd rather be." *

BACK

Treasury & Risk Management Magazine July 1999

YOU'VE LOST THAT LOVING FEELING

Treasurers are increasingly fed up with--and fleeing--the large insurance brokerage firms.

By Russ Banham

Like other medium-size companies, $160 million Airxcel had bought the blarney that bigger was better. A few years ago, the Wichita, Kan.-based recreational-vehicle products manufacturer switched from a relatively small regional insurance broker to Aon Group, a brokerage behemoth. But the company grew fed up with a lack of personal service and was back with its old broker--Insurance Management Association (IMA) in Wichita--after a year.

"I've got nothing bad to say about Aon," says Richard Schreck, Airxcel's chief financial officer and treasurer, "but I saw their rep one time, and then he left the firm. We wanted a broker that offered local service and a team of professionals that would stick around for awhile."

Ditto for New England Business Service, the business-to-business direct marketing company based in Groton, Mass., that turned away from a megabroker to the privately owned regional firm The McCarthy Cos. in Wilmington, Mass., two years ago. "We were with a big broker and just weren't getting the attention we deserved," says Tim Althof, the company's treasurer at the time of the change and currently its vice president of investor relations. "We're not a huge company, with about $355 million in revenues last year and about $470 million anticipated this year. But we wanted a broker that would treat us like one of its larger clients."

Indeed, hundreds of other mid-size and even some Fortune 1000 companies have made similar switches to smaller insurance brokers in the last few years, according to John Bowman a consultant with Tillinghast-Towers-Perrin in Boston. Distressed over megafirms that seem to forget their existence, these companies are now getting the handholding they want from a group of roughly two dozen super-regional and emerging national brokerages. These firms, in turn, have been bingeing on new talent, expanding services and tapping into international networks to compete effectively with the industry's big boys.

The Talent Exodus
This has come about as mergers and reorganizations have pared the upper echelon of the insurance brokerage industry to a few players and sparked an exodus of talent to the smaller firms. Even many insurance companies once loath to conduct business with the regional brokers are doing so now. "Insurance companies are finally treating us like they've always treated the [big] brokers," says Bill Cohen, chief executive officer at privately-owned IMA.

Not surprisingly, the regional and emerging national brokers are using the opportunity to target more than small companies. "They're moving up the food chain to larger accounts," says Thomas Kaiser, chief executive officer of enterprise risk at Zurich US, a $4 billion Schaumburg, Ill.-based insurer.

While the effort won't put the top brokers out of business, it is certainly giving them a competitive run for their money. "Just when the megabrokers thought they had it all," says Kaiser, "these seemingly inconsequential regionals are hiring the right people, putting together tremendous service capabilities and offering choice to a marketplace that feels choice has been taken away. We're not the only insurer seeing a lot of business migrate in its direction."

The megafirms have only themselves to blame for the void in their business that the regionals are attempting to fill. Ten years ago, corporate risk managers barely glanced at such firms. "If something went wrong," Cohen explains, "they (risk managers) could always tell their boards they went with the safest bet--the biggest brokers in the land."

But most of the so-called "alphabet" houses--M&M (Marsh & McLennan), J&H (Johnson & Higgins), A&A (Alexander & Alexander) and C&B (Corroon & Black)--have been merged-and-acquired out of existence, leaving the industry with just two monoliths, $6.5 billion Aon in Chicago and $7.1 billion Marsh, Inc. in New York, and a third-place laggard Willis Corroon, the private brokerage based in New York. These giants subsequently downsized and lost a cadre of top brokerage executives to the regionals in the process.

"The big brokers are more internally focused now than they have ever been," says Zurich US's Kaiser, "given the huge number of acquisitions they've undertaken and the organizational changes that has required. All this internal attention doesn't necessarily translate into something good for customers."

Large brokers historically have a tough time appealing to middle-market companies, says Gary Griffith, chairman and chief executive officer at Summit Global Partners, a five-year-old Dallas-based broker operating in 11 states. "The large brokers have great skill sets," adds Griffith, a former executive at C&B, "but often it is difficult for them to get those resources down to the level of a corporate buyer in Dallas or Omaha."

Smaller Is Nimbler
Great size can prove clumsy and ultimately stifling to entrepreneurially-oriented executives. Decision-making also suffers in a labyrinth organization, contends Al McDowell, president and chief executive officer at Rebsamen Insurance, a $25 million Little Rock, Ark.-based brokerage with a staff of 200 employees.

"A firm our size can make key decisions quickly for our clients on a day-to-day basis," says McDowell, "as opposed to brokers that are 50 times our size and have layers of authority to wade through before anything gets done." Bill Brouillard, executive vice president of The McCarthy Cos., with $100 million in 1998 premium volume, concurs: "We don't report to the home office; we are the home office."

Dissatisfaction with an increasingly hierarchical bureaucracy at the megafirms has motivated many executives to head elsewhere. ABD Insurance & Financial Services, the $65 million Belmont, Calif.-based brokerage, hired more than 20 new executives culled from the megabrokers in the last 18 months. "As a result of all the aggregations, we have been able to pick from the best," says Fred de Grosz, president and chief executive officer at ADB. "We've actually hired full teams of people, including a unit from one megabroker that specializes in foreign-owned U.S. businesses. We now have the book of business it had with the megabroker."

Treasurers and risk managers will often follow their brokerage executives from one firm to another. "When we were with A&A, we worked with a fellow named Bill LaFrance for many years," says Roger Andrews, general counsel and director of risk management at privately owned E.D. Bullard, a Cynthiana, Ky.-based protective equipment manufacturer.

"When A&A was gobbled up by Aon," Andrews continues, "the new owners tried to take the administration of our account away from Bill and put it in the "small accounts" category. We faced the prospect of a 22-year-old handling our account. So when Bill moved on to McCarthy, we moved on, too. We want people who have an institutional memory of our company overseeing our business."

Armed with the expertise provided by all this new blood, the regional brokers say they can compete against the service standards set by the megabrokers. "The people at our front lines are our top-dog people," IMA's Cohen says. "With a large national broker, the best a middle-size and larger company is going to see is its third- or fourth-tier guys."

But do the smaller national brokers and their regional cousins really stack up against an Aon or Marsh--firms with thousands of employees, multibillion-dollar revenue streams and dozens of offices around the world? Marsh alone offers a wide array of services, including employee benefits consulting, loss-control engineering and securities trading. It is also an incubator for new risk-transfer strategies, such as enterprise-wide risk management and double-trigger programs. Moreover, it has so much business volume it can make virtually any insurance company swallow its conditions whole.

Smaller brokers are holding their own against such seeming omnipotence. The super-regionals, although far smaller, have amassed international capabilities, innovative risk-transfer solutions, captive management skills and alternative market knowledge. ABD, for example, has seven engineers on its staff of 450 employees, relationships with virtually every insurance company here and abroad and a roster of clients that range from 1990s newcomers such as Adobe Systems and @Home to the venerable Philadelphia-based chemical concern Rohm and Haas.

An International Reach
Like other independent brokers--the term it prefers--ABD belongs to an international broker network, an affiliation that gives its multinational clients access to the services of other brokers around the world. "We're a founding member of the World Broker Network," President de Grosz says, "which has ground troops in 65 countries. If a multinational client needs an engineering study done for its factory in Germany, our partner in Munich takes care of it."

Most of the regionals belong to such networks, which include Assurex International, Intersure Partners and RiskProNet. Rebsamen, for example, belongs to Globex International Group, a Mountain Lakes, N.J.-based network made up of 250 international brokerage members of similar profiles. "It used to be easy for a risk manager to ignore a broker without offices all over the world," Rebsamen's McDowell says. "Since most of us have now joined international networks, that's no longer the case."

Tillinghast's Bowman says the networks level the playing field. "Beyond the top 10% of multinational companies, the regional brokers match up quite effectively with their clients' international operations," he says. "Moreover, as insurers become increasingly less dependent on brokers to provide client services, the regionals can fill any gaps with what the carriers offer."

Regional broker IMA does just that for $36.3 million Rogue Wave Software. IMA reviewed St. Paul Cos. for Rogue Wave to make sure the Minneapolis-based insurer had what the company needed in terms of overseas and domestic coverages. 'When we were with Willis Corroon and, subsequently, Sedgwick, not only did I never meet my carriers, I barely met my brokers," says Mary Taylor-Smith, who is in charge of risk management at Rogue Wave.

Promises, Promises
Taylor-Smith says the megabrokers promise partnership but don't deliver. "When I came on board in 1998," she says, "I received this gigantic policy binder from Willis Corroon. I called them to discuss our coverages, and each time I got a new service rep. I wanted to schedule time to go over my questions, but the company never could arrange it."

So Taylor-Smith switched her business to Sedgwick, a broker that is now part of Marsh. "Two people came to visit us last August and talked a lot about service and personalization," Taylor-Smith recalls. "But when it came down to doing the nitty gritty--helping me through the maze of policies, coverage terms, year-2000 issues and so on--they were nowhere to be found." She contends the broker just took the policies we had with Willis Corroon and copied them.

After moving her business to IMA, Taylor-Smith learned that Rogue Wave was uninsured for coverages it required. "We didn't have employment practices liability insurance, which we needed, and our umbrella liability policy limits were too low," she says. "Both coverages had been overlooked by our previous brokers.

"More importantly, I sensed our new broker understood the software business," she continues. "It follows developments in the industry and the new risks these developments present."

For all the perceived advantages of smaller regional and national brokers, the megabrokers won't easily relinquish their middle-market business. Certainly there are drawbacks to going with smaller firms that the giants will exploit. For instance, even with access to broker networks, the regionals still don't approach the international breadth of services offered by the biggest firms. Regional and smaller national firms are also more subject to acquisition or merger.

Still, for middle-market companies, the personalized service that smaller firms offer may ultimately give them the edge. "This is a 'people' business," says Zurich US's Kaiser. "The regionals are saying to prospective customers, 'If you're getting lost inside these huge organizations, we can put together a team of professionals that will give you all you need.' Evidently, there are a lot of customers out there that don't feel loved."

BACK

Why Political Risk is Important to You
By Sam Wilkin

And eight tips on how to deal with it

Political risk is the threat that politics or political players will have a negative impact on a firm’s asset values, costs, or revenues. In general, large-scale political events—such as military coups, social unrest, and currency crises—are referred to as macropolitical risks. Conversely, small-scale events—such as expropriation, discriminatory regulation, and terrorism—are referred to as micropolitical risks.

Almost all businesses are vulnerable to large-scale political crises such as those witnessed recently in Indonesia and Russia. Portfolio investors have more to fear from large-scale political events that have an impact on the value of the assets they hold, whether stocks, bonds, or currencies. Traders, lenders, and direct investors may also suffer from direct government interference in their operations.
At its most basic level, you should break political risk down into three areas: assessing it, managing it, and developing and implementing a political risk management strategy. Based on two decades of experience as political risk consultants to international businesses, we present eight specific tips on dealing with these three areas.

Political Risk Assessment
Political risk assessment means evaluating the likelihood and severity of political impacts on a firm’s bottom line. Assessments can vary from narrative descriptions, to scenarios, to quantitative measures of risk. There is no single best kind of assessment. A good assessment presents information in a practical form that is useful in making a sound business decision.

Tip No. 1: For direct investors, there is no “one-size-fits-all” assessment. Off-the-shelf country reports are good for the big picture. But micropolitical risks vary widely from project to project. For instance, data on expropriation risks show that wholly owned projects are more than three times as risky as minority joint ventures. The data also show that low-tech projects face substantially higher risks than high-tech ones. Projects in strategic industries, such as automotive, telecommunications, and power production, suffer much more government intervention than projects in other industries. Plants employing large numbers of workers attract more government attention than small plants. However, the more exports a project generates, the less risky it is because host governments, in general, look favorably on export revenues. The list goes on.

In other words, an off-the-shelf report can only give you a ballpark idea of how risky your investment really is. Some risks are counter-intuitive, so relying only on an “off-the-shelf” report can itself be risky. For example, some projects in low-risk countries will actually face relatively high micropolitical risks. For instance, dam construction projects in Europe and the US often face severe political risks due to the environmentally sensitive nature of the projects. Conversely, some projects in high-risk countries may actually be at relative low risk. For instance, a colleague once agreed to provide political risk insurance for a trade transaction in which a US cigarette manufacturer was selling cigarette rolling paper to Iraq during the Iran-Iraq war. This trade should have been impossibly risky, since war-torn countries with collapsing economies are notorious for failing to pay their bills. But soldiers need cigarettes, and Saddam Hussein never failed to pay on time.
Tip No. 2: Tap your local offices or local partners for intelligence on micropolitical risks. It is certainly true that country managers often miss “big picture” problems. Managers in the field tend to downplay signs of trouble, especially if they have experienced a long run of stability and growth. Furthermore, managers’ career advancement prospects are often tied to the expansion of the projects or investments under their stewardship. Hence it is a rare manager who will encourage the head office to reduce exposure to his or her country.

But ignoring local managers altogether is a sure recipe for trouble. Country managers are often far better than headquarters at assessing micropolitical risks (such as government intervention). Micropolitical risks are, by their nature, on-the-ground risks. Knowledge about such risks often comes from personal relationships with local contacts. This point is illustrated by a case in which a major US pharmaceutical company decided to increase the price of a market-leading drug it was selling in Mexico. The Mexican office of the company objected to the price hike on the grounds that the government, for political reasons, wanted to avoid higher prices on life-saving drugs. The head office went ahead with the price changes anyway, and the Mexican government responded harshly by immediately imposing price controls. From that point forward, all price changes had to be pre-approved by the government (putting the firm at a substantial disadvantage with respect to its competitors).

Tip No. 3: When assessing macropolitical risks, focus on the fundamentals. In the early 1990s, traders, investors, and lenders rushed to do business with Indonesia. Superficially, the country seemed stable. Indeed, as of July 1997, a widely-used market measure of country risk—the risk premium on the country’s sovereign bonds—identified the Czech Republic as a more risky investment location than Indonesia.

Only a few months later, instability and policy crises disrupted trade and precipitated severe losses for both direct and portfolio investors. How could international businesses have anticipated the high risk of political trouble?

The pitfalls of headline-driven political risk analysis can be avoided by focusing on the fundamentals. Suharto and a group of technocrats made Indonesia appear attractive for a long time. But cronyism and corruption were rampant,. The country was essentially a dictatorship, and poverty and income inequality remained widespread (the ethnic Chinese made up 4 percent of the population and owned an estimated 60 percent of the wealth). Furthermore, there were no independent policymaking institutions (such as a central bank) to restrain poor policy decisions by the regime. These fundamentals pointed to high levels of political risk.

Carefully reviewing these fundamentals and avoiding placing too much reliance on positive daily news reports is essential when making assessments. An econometric model created by Marvin Zonis, professor of International Political Economy at the University of Chicago Graduate School of Business (and founder of Marvin Zonis + Associates), successfully identified Indonesia in 1996 as ripe for a serious political crisis by applying fundamental variables such as those mentioned above. On a 1-10 scale, with 10 being least risky, Switzerland achieved the best political risk score at 8.2, Argentina scored 5.6, and Indonesia scored 2.7 (only three countries in the sample scored lower). In short, when the fundamentals are wrong, political risks may be looming even if the daily news is seemingly positive.

Political Risk Management
Political risk management is a firm’s response to political risks. This response can range from benign neglect (hoping for the best), to a sophisticated program of political risk insurance, to proactive management of political relationships.

Tip No. 4: Be aware of changes in your bargaining power. Even investors who focus heavily on political risk management sometimes treat risk management as a “fire-and-forget” tool. Investors tend to focus their energies on up-front bargaining. They establish relationships with host-country officials, sign the relevant, carefully specified contracts, and assume their troubles are over.

This approach is dangerous. Dramatic shifts in bargaining power often occur over time. For instance, one of the most dramatic bargaining-power shifts that occurs is the shift between the negotiation stages of a project (when the investor holds all the cards) and the operation stages of a project (when the investor’s sunk capital is in the hands of the host country). If the investor ignores these shifts, the host-country government may take action against the investor.

This point has been dramatically illustrated in recent years in Siberia. Contract disputes and legal discrepancies have an odd way of arising as soon as development gives way to production. In one case, an investor negotiated a very attractive deal, in 1993, to develop a diamond mine. In 1995, however, as development was wrapping up, the firm’s local partner claimed exclusive control of the joint venture, with the tacit blessing of the Russian government.

Another type of bargaining-power shift occurs because political relationships are not static. Investors who cultivate powerful contacts in the host government often find themselves in hot water later on. For instance, in Pakistan, power producers were able to negotiate very attractive deals with the Bhutto government. But when the Sharif government came to power, the investors’ political connections became liabilities. After Sharif’s ill-fated decision to test nuclear weapons led to economic meltdown, the state electricity distribution company unilaterally reduced tariffs, in many cases by more than 50 percent. In addition, investors are now at risk of prosecution for corruption.

Investors run a high risk of being “caught out” as their bargaining power changes. They can avoid this problem by anticipating bargaining power shifts and securing more appropriate deals from the outset. They can also use proactive relationship management to keep the government happy and mitigate their risks. And they can apply investment strategies that increase their bargaining power over time, for instance, by holding out the promise of another major investment project in the future if the host country sticks to the original bargain.

Tip No. 5: Manage political risks before they happen—not after. Firms cannot affect the likelihood of catastrophic risks—such as military coups, currency crises, earthquakes, and hurricanes. But micropolitical risks—such as contract frustration or discriminatory regulation—are acts of government, often taken against a specific investor or group of investors. This offers a tantalizing possibility: If a firm can directly influence those with political power, it may be able to defuse political risks before they occur.

The key to mitigating micropolitical risks is relationship management. This means managing your relationship with the host country so that it is always in the host government’s interest for your investment to continue to operate profitably.
Strategies for relationship management can involve person-to-person relationships with key players in the host government—from the innocuous “keeping a channel of communications open,” to questionable practices, such as making campaign contributions. Other strategies focus on “corporate citizenship activities,” such as funding infrastructure, education, or housing in the host country. Still other strategies provide enticements for the host government—such as technology transfer, increased employment, or further investment.

In our experience, many businesses fall into the pitfall of responding to political risks in crisis mode. When something goes wrong, the business lurches into action, sending top management personnel—often backed by big-name lawyers and ex-politicians—to deal with the problem. This approach often delivers impressive results. But it is hugely costly in terms of project delays, taking up senior management’s time, and the expenses involved in sending VIPs to lobby on the firm’s behalf.
In political risk, the old adage applies: An ounce of prevention is worth a pound of cure. Relatively low-cost investments in relationship management, monitoring micropolitical risk, and staying abreast of bargaining power can pay huge dividends in avoiding political risks. As is the case in medicine, these preventative measures lack the glamour and drama of a high-profile surgical cure. But in terms of pain and suffering, risk of failure, and expense, prevention is the way to go. A company that carefully monitors a host government’s attitude and demands can head off problems before they occur.

A critical point is that political decisions, once made, are hard to reverse. Once a government announces a new policy, its political reputation is on the line. A negotiating situation turns into a win-lose situation, in which only high pressure can force key players in the government to accept defeat and reverse their decisions. In one recent case, a business enlisted the help of the US ambassador, the US Treasury Secretary, and the Department of Energy to press its case, in addition to weeks of the CEO’s time. Impressive but expensive. Far better to influence the host government’s decision before it is made.

Tip No. 6: Public-sector political risk insurance is often worth the hassle. Political risk insurance can allow an investor or trader to do business in countries that would otherwise be too risky. In many cases, banks will require political risk insurance before they will put up capital to fund a project. Coverage is available for a wide variety of political risks, ranging from expropriation, to contract frustration, to trade disruption, to political violence, and the like.

For direct investors or traders, private-sector coverage is often attractive. The terms are more flexible and the coverage greater. By contrast, public-sector insurers tend to require long, arduous application processes, demand compliance to stringent environmental and development-promotion criteria, and take from two to four months to issue coverage.

But from the point of view of the investor or trader, public-sector insurers possess a critical advantage. They are backed by governments or multilateral institutions that have the ability to pressure governments that interfere with investments or trade. Hence, public-sector insurance actually reduces risks (it is like buying car insurance that somehow makes you less likely to get into an accident). For risky investments or trades, this makes public-sector coverage well worth the concomitant difficulties. (On the other hand, for political risks not associated with a specific company, one might buy private sector insurance and “freeload” off the pressure exerted by the public agencies who insured others.)

The most extreme example is the Multilateral Investment Guarantee Agency (MIGA) of the World Bank Group. Due to its link to the World Bank, MIGA can threaten financial sanctions on wayward governments (a colleague of mine refers to MIGA as the “mafia of political risk insurance”). Despite extensive coverage of risky locations, since its founding in 1988, MIGA has yet to pay a single claim. Its record is threatened in the wake of the Asian Crisis, but having a project underwritten by MIGA may be the closest thing the political risk world has to a silver bullet.

Political Risk: Impact on Organization
and Strategy
Dealing with political risk is costly, both in terms of operational efficiency and in terms of management time and effort. Therefore, firms should develop a well-reasoned strategy for political risk management. Furthermore, political risk management programs are difficult to implement. Often, organizational adjustments must be made so that a political risk management strategy can be implemented effectively.

Tip No. 7: Make sure organizational incentives promote sound political risk management.
A common problem, which affects almost all types of businesses, is that firms fail to act on their assessments of political risk. Once a project, trade or investment looks attractive, it is hard to turn it down just because of political risk. As mentioned earlier, it is a rare country manager who will encourage the head office to reduce exposure to his or her country.

There are a number of ways to deal with this problem. Active management of a firm’s global risk portfolio is critical. So is dissemination of useful political risk information throughout the organization. Adjustments to managers’ incentives are also important. If managerial compensation and advancement prospects are determined not only by returns but also by risks (including political risks), these managers are more likely to respond appropriately to political risk assessments that indicate danger.

Tip No. 8: Some firms use political risk management as a source of competitive advantage.

In our experience, most firms see political risk management as catastrophe avoidance. This is certainly one aspect: No firm wants to see its investment expropriated or suffer severe losses from a currency crisis.

But skills in political risk management can also increase profits. One reason is that firms operating in risky countries generally face far less competition. Potential market entrants are scared off by political dangers.

In addition, good political risk management—especially through relationship management—allows a firm to ward off government intervention. Therefore, firms with a core competence in political risk management can earn higher profits than their competitors. They will face fewer regulatory burdens, suffer fewer acrimonious contract renegotiations, and so on, than other firms.

Almost all firms must deal with political risk, at least in terms of avoiding losses from political catastrophes. How far a firm proceeds—in developing better assessments of political risks, developing more sophisticated political risk management capabilities, and refining political risk strategies and organization—depends on how important political imperatives are to a firm’s success. In general, those firms that are more globalized, do business in riskier countries, do business more directly with governments, and have a more visible foreign presence, will gain more from effort expended in dealing with political risk.

Wilkin is Director of Country Analysis at Marvin Zonis + Associates, Inc., a political risk consulting firm based in Chicago (www.mza-inc.com).  

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Small is Big Again
by John Conley