23/06/2010

By Helen Yates

Examples of poor risk management in emerging markets inevitably steal the headlines. In China, lax safety standards are cited as the main cause of the flooding in March of a coal mine in the northern Shanxi province
that trapped 153 workers. Non-adherence to designated construction codes was blamed for the collapse of many buildings in the Sichuan earthquake of 2008. At first view, the emerging markets don’t appear to have much of a track record in establishing robust risk management.
But the world is changing rapidly, and the rising profile of countries such as China and India in the global economy
is driving closer attention to risk management ideas and practices. Much of the change emanates from the multinationals that operate in these burgeoning economies, or from western joint venture partners. Supply chains are also helping to foster better risk management. Local companies supplying goods and parts to more developed markets are increasingly subject to tighter production standards.
“China has shown the world it can move very quickly in a short period of time,” says Jose Ribeiro, director of international markets at Lloyd’s. “Chinese corporations are still pretty much domestic, but I wouldn’t be surprised if very soon we see global corporations being created. These companies will have to have a more mature risk management approach in other countries. Once they start using it in their own country then their domestic competitors will follow. So it will trigger a change in how people view risk management.”
The announcement that previously little-known Chinese car manufacturer Geely has finalised its deal to buy Volvo, from Ford for $1.8bn, could be an indication of things to come. Global brands demand a sophisticated approach to risk management. India already has its fair share of global brands, including Tata, Oberoi, Mittal and Birla. But it has not triggered a ripple effect in this market, and there is little evidence that best practice begets best practice in domestic firms. “It’s completely inconsistent,” says Ribeiro. “You have pockets of excellence and pockets where there is a complete absence of decent levels of risk management.”

Price-driven market
These examples of excellence will remain few and far between for the foreseeable future, believes Ribeiro. The attitude of many emerging market companies is to regard insurance as a risk management tool. Encouraged by the dearth of cheap insurance, businesses cede the majority of their risks. “The more emerging markets are very price driven – they don’t see the need to do things that don’t impact on price,” he explains.
With China such a major supplier to the US and Europe, factories have come under pressure to comply with quality standards and regulations in those developed markets. This doesn’t necessarily mean firms take a holistic approach to identifying, mitigating and managing their risks. “In China there’s tremendous demand for coverage for product recall and product liability, because the Western companies that buy Chinese products are very concerned about those sorts of issues,” says Ribeiro. “So the approach is not really a risk management approach – it’s more about buying product liability or recall coverage, and buying the cheapest possible.”
The lack of insurance brokers is also an issue. A major part of the broker’s role is assessing their client’s risk profile, and recommending steps to improve risk prevention and mitigation before considering what coverage is required. Ribeiro contrasts the largely direct markets of India and China with Brazil, where the situation is very different. “Most Brazilian companies already have risk managers; brokers are widely used and broker penetration is extremely high.”
In price-driven markets, it is a tough sell to convince senior management to focus on ‘softer’ issues, such as health and safety or contingency planning. It often takes a major event to open their eyes to the need for better controls, or to prompt more stringent codes and regulations. The financial crisis is encouraging boards to take a closer look at their organisational risks, while the Sichuan earthquake underlined the need for closer oversight on construction projects. In China, and elsewhere in the Far East, the SARS outbreak in 2002 and 2003 and the more recent H1N1 swine flu scare have raised risk awareness and improved hygiene standards.
While health and safety standards are slowly improving, in part driven by these events, insufficient attention is paid to business continuity, which doesn’t rank as an issue in emerging markets. The UK floods of 2007 revealed that while many companies were covered for damaged assets, their biggest losses were from business interruption. “When you have catastrophes and big events, people start realising they should be covered in a different way,” says Ribeiro.

Lost in translation
At XL Insurance, property risk engineering practice leader Huw Chandler reports that one of his team’s roles is to inspect the local operations of international organisations. They advise them on how to improve their risk management, with the aim of bringing it in line with the parent company’s approach. Getting buy-in in new territories isn’t always easy. “The problem with risk management is that it’s only an issue once you’ve had the event,” he explains. “It’s very hard to
get people to spend money to implement practices or protections if they don’t think it’s going to happen. In the current market money is tight, so we need the full support of the risk manager to help drive the culture.
“People in developing markets like to hear real examples of where it went wrong, so you’re not just spouting from a textbook,” he adds. “The further east you go, you find the local markets have this concept where it’s fate and that’s what’s going to happen. There’s a degree of making people realise they can influence the outcome, rather than just accepting that it’s going to happen.”
Advice from risk consultants often focuses on improving existing risk mitigation measures, while instilling a culture of best practice. “In the UK, fire extinguishers are normally on the wall and pretty well labelled,” explains Chandler. “In a developing country they sometimes could be used to block
a door open, because the same discipline isn’t there.”
His team also reviews construction and occupancy. “Maybe the earthquake construction methods aren’t quite as rigorous as in places like California, where there are strict codes. The protections – fire alarms or sprinklers – may be used in lesser approved equipment that haven’t as undergone as rigorous testing, so they may not be as fail-safe,” adds Chandler. “In the UK it’s now illegal to smoke in any workplace, but go further east and you find there’s a different smoking culture that’s harder to drive out – although attitudes are changing.”
Pointing out weaknesses can result in a loss of face for the site manager; something consultants and risk managers need to be aware of. Whistle-blowing is also taboo, with staff rarely empowered or able to suggest improvements, even where there are dangerous failings. It is often easier to take the ‘bad news’ from a third party, such as a broker or consultant.
It’s all in the delivery, says Chandler. “I’ve got experience in India, China and other markets, and you tend to find your first experience the hardest. It’s not just what you’re saying, it’s convincing them to buy into what you’re doing. In certain countries if you say ‘It’s a good idea to do this,’ they think it’s just that: a good idea. You have to say, ‘it’s mandatory to do this’, or ‘it’s critical that this is implemented’.”
Businesses can be more easily encouraged to adopt better risk practices when there is a financial incentive. Access to insurance coverage at favourable terms and pricing is one way to get buy-in. “I explained this to a client in the east a while ago and said, ‘Installing a sprinkler system won’t necessarily get you x% discount, but if the market gets tougher you’re one of the more attractive risks and it should be easier for you to gain insurance at better rates’.”

Education process
Encouraging emerging market companies to invest more in risk management is a long-term education process, believes David Herratt. Based in Hong Kong, he is a regular mentor and speaker on risk management and wants insurers to dispel confusion on what it entails. “There is a fantastic opportunity of education and bringing professional recognition to Asia.”
Not that the process is all one-way. There is plenty that Europe and North America can learn from an emerging market approach to risk management. “We should not assume the West knows it all,” says Herratt. “Asia may have
a better approach to managing people risk, creating loyalty and caring in a sincere way for employees. Some events
show how certain organisations respond immediately and generously, and are not encumbered with legal ‘what ifs’ regarding liability just because they assist an employee or the family. This creates a loyal workforce, reduces staff turnover and improves productivity.

Helen Yates is a freelance contributor to Risk Management Professional

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