The United Kingdom’s recent vote to sever ties with the European Union will have global economic consequences. The ramifications of an EU economic retraction resulting from financial uncertainty will undoubtedly reach Latin America. The cross-border insurance industry will likely not be spared. Multinationals with local operations must be proactive to get ahead of the storm – now is the time to review the unique aspects of their business and their target markets to pinpoint their ideal risk management structure, and to ensure that their insurance regimes sufficiently anticipate the shifting risks in this dynamic bloc.
Brexit Risks Facing Latin America
Companies with business interests in Latin America will likely face the following Brexit risks:
- Downward pressure on global commodity prices. A general decline in European trade will increase downward pressure on already-depressed global commodity prices as demand falls for oil, minerals, and other raw materials upon which Latin American economies depend. Hunton & Williams LLP corporate partner Uriel A. Mendieta, whose Miami-based practice includes significant cross-border work in Latin America, was recently quoted on this important topic: “The impact on Latin America is going to be directly tied to what the impact of Brexit is on the EU economy. The general slowdown in the economy would be No. 1 on the list because that affects commodity prices.” Moreover, a general decline in manufacturing orders place by European companies would compound this effect by leading to a decrease in Chinese manufacturing sector raw material orders placed with Latin American providers. As demonstrated by the effects of the recent drop in oil prices on petro-states such as Venezuela and Argentina, a further decline in commodity prices could lead to an increased risk of Latin American sovereign and corporate insolvency.
- Trade agreement uncertainty. Several Latin American nations that have effective trade agreements with the European Union do not have similar bilateral agreements directly with the United Kingdom. (For example, Colombia and Brazil.) In an interview with Bloomberg, Colombian President Juan Manuel Santos has recently described the situation as harmful to his country’s economic interests: “I sincerely hope that British people once again demonstrate their intelligence and vision and vote to not get out of the European Union – I think it would be a big mistake. We have a very good relationship with the U.K., and with the rest of Europe, and just simply to start negotiating everything again with the U.K., it’s a headache.” Moreover, there exists the possibility that Brexit might be part of a broader anti-globalization trend. As Latin America states such as Argentina have moved away from leftist ideologies in favor of international cooperation and foreign trade, potential trading partners might be looking to retract their support of globalization. This uncertainty will compound the decline in trade due to the increased uncertainty of the possibility of resolution of investment disputes through mechanisms such as arbitration as provided for by effective trade agreements.
How to Protect Against Brexit Exposures Through Insurance
One particularly important resource to hedge against Brexit risks is Trade Credit Insurance, which is insurance designed to protect, for example, sellers of goods and services on credit against the risk of customer non-payment due to customer insolvency, protracted default, political events, or acts of war that prevent contract performance. As an example, the following forms of coverage are available on the international market:
- Single buyer policies. These policies enable sellers to protect against exposure of non-payment by a single key customer. They are available for short and medium terms.
- Comprehensive domestic & export credit insurance. These policies provide global sellers flexible safeguards against negative impacts on account receivables, including customer default and political events.
- Accounts receivable coverage for key customers. These policies protect against exposures associated with specified domestic or global customers: either the company as a whole or a subsidiary/division.
- Domestic, foreign, global accounts receivable insurance. These policies cover any loss from buyer non-payment due to buyer insolvency, protracted default, or failure of the exchange authority in the buyer’s country to transfer foreign currency.
- Trade credit for multinationals. These policies provide global sellers with a controlled master program that combines the advantages of local and global credit insurance. They enable companies to maintain consistent protection and control in every market in which they operate.
- Credit insurance for banks & financial institutions. These policies provide protection against risks associated with global credit exposure and bad debts.
Trade Credit Insurance is often included as part of a comprehensive insurance coverage program to minimize international risk exposure and is likely to called upon to respond to many exposures and losses caused by Brexit. Commonly used insurance structures to protect against cross-border risks that are likely to be used to manage Brexit risks include:
- A global policy approach is centralized: the parent company purchases a single insurance policy in its home country to cover the parent company, its subsidiaries, joint ventures, and cross-border interests.
- A locally-issued policy approach is decentralized: the parent company purchases a stand-alone policy in each country where it conducts business. The coverage terms and limits are tailored to the local needs, laws, and customs of each individual country.
- A controlled master program uses a mix of global and locally-issued policies to leverage their respective advantages: the parent company supplements a global policy with local policies for territories where it conducts business, and fills local coverage gaps with a Differences in Conditions (“DIC”) or Differences in Limits (“DIL”) policy.
Finally, in developing a Brexit risk management strategy, businesses will want to consult competent insurance coverage attorneys who are familiar with cross-border insurance issues to identify and best minimize these novel exposures, and to offer strategic advice on how to best ensure coverage from effective Trade Credit Insurance policies or other appropriate cross-border insurance coverages.