Spotlight on Latin America: Opportunities Abound Despite Challenges

By Magaly Olivero
AIG
Multinational companies that can navigate Latin America’s unique diversity of cultures, languages, and environmental and policy concerns will be well-positioned to grow their businesses in the region.

This will require them to have sound risk management strategies.

“Latin America has tremendous opportunities for growth,” said Matthew Kletzli, head of the regional multinational risk practice for Latin America at American International Group, Inc. (AIG), a global insurance organization that has been serving the region for over 75 years.

In recent years, Latin America has become increasingly important in the global economy. And while the International Monetary Fund recently trimmed its growth forecast for Latin America, economic activity in the financially integrated economies — Brazil, Chile, Colombia, Mexico, Peru and Uruguay — is expected to pick up, with gross domestic product growth projected to be 2.7 percent in 2014 and 3.5 percent in 2015, according a survey the IMF released in October.

The region extends from the high desert of the U.S.-Mexico border to the rugged coastline of Argentina  — more than 6,000 miles in all. Latin America includes the world’s largest river by volume, the Amazon; oil-rich deposits; large stores of minerals; and an increasing number of global brands. The combination of natural and man-made resources has made it attractive for foreign investors.

But Latin America also presents unique challenges. The countries vary markedly in their economic and regulatory environments, monetary policies, tax structures and ease in conducting business. Geophysical risks, including hurricanes, earthquakes, landslides and volcanic eruptions, can also impact business locally.

Against this backdrop, insurance coverage remains vital. Companies can select from a number of different options that address local and global concerns. For companies to make the right decision, they must think carefully and logically about their needs.

Customized approaches
Kletzli advises clients to assess risks and benefits before taking the leap into Latin America. He says companies should ensure that insurance coverage is customized to a company’s specific exposures, preferences and needs.

What works for one business may not have the same benefit for another. Even companies operating in the same industry and country can face different sets of issues.

As part of the assessment process, AIG has created an award-winning Multinational Program Design Tool to assist companies in analyzing their risks country by country. The interactive tool evaluates user feedback on exposures, geographic locations, risk sensitivities, preferences and needs against AIG’s knowledge of local regulatory, business and market factors, as well as trends. The tool then produces a detailed report that can be used at the next level of discussion with brokers and AIG on a global insurance strategy .This product provides clients with information about “factual risks” as well as “subjective risk perceptions,” said Kletzli.

“Here’s where customization comes into play,” he said. “Some clients are risk averse and want everything covered by an insurance policy. Others are more accepting of risks and don’t mind having large deductibles and taking care, on their own, of issues they deem less significant.”

Steeped in tradition

While business practices vary widely, understanding the linguistic and cultural nuances of each country is crucial for success. “Portuguese is spoken in Brazil, whereas most of the remaining region speaks Spanish, but even the Spanish spoken varies with dialects and words differing from one country to another,” Kletzli said.

Given its large and long-standing footprint in Latin America, AIG possesses a unique ability to help clients navigate cultural terrains. “We have many locations and people in every country who are familiar with the culture and can consult about the risks clients are going to face,” Kletzli said.

Regulatory challenges

Kletzli said that public policy uncertainty remains “one of the biggest concerns” for multinationals, whether they’re coming from the United States, Europe, Asia or elsewhere. For example, environmental and industry regulations differ among countries, an important factor for clients to consider if they are working across borders and entering into contracts with local counterparties.

Mexico, Brazil, Colombia and Peru have taken steps in recent years to create a more stable and inviting economic environment for foreign investors. In 2013, Mexico substantially reduced the number of procedures to start a business, eliminated unproductive paperwork, made the process of paying taxes easier and reduced logistical barriers for exporters. According to the International Finance Corporation, the World Bank’s institution for the private sector, at least half of Latin American countries carried out regulatory reform to improve the economic climate.

Seeking sophisticated solutions

As for industry trends, multinational clients are inquiring about more sophisticated risk management strategies, such as controlled master programs that combine global and local policies and captive insurance companies for employers looking to self-insure.

“The key advantage of a controlled master program is that companies have centralized decision making and the flexibility to adopt country-specific strategies,” said Kletzli. “This eases the administrative burden on local employees and provides risk managers with a better understanding of their company’s overall needs.”

Looking ahead, Kletzli believes that multinationals willing to exercise tailored risk mitigation solutions and adapt to Latin American’s unique environment will enjoy a competitive edge. This will be increasingly important as emerging markets take a larger share of global business.

“We’re here to serve as trusted advisors,” said Kletzli of AIG’s role in the region. “With the right partner to manage risks appropriately, multinational companies will find great opportunities in Latin America in the years to come.”
Read more AIG content