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Risk management practices short-sighted at most Latin American companies

Outside of energy, finance risk culture undeveloped

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Risk management practices short-sighted at most Latin American companies

RIO DE JANEIRO — Companies in Brazil and throughout Latin America go out of their way to avoid identifying, acknowledging and insuring their risks, risk management professionals in the region say.

Aside from the banking and energy industries, the predominant corporate culture among firms that monitor operational risks is to take a short-sighted view within a department rather than assessing the broad exposures of the entire enterprise.

The prevailing sentiment among Latin American companies is, “I don't want to face risks,'' said Javier Mirabal, executive director of Plano, Texas-based Mirabal Risk Management L.L.C. and of Asociación Latinoamericana de Administradores de Riesgos y Seguros, the Latin American risk managers' association.

“We have to develop a risk culture in Latin America,'' Mr. Mirabal said in late November, speaking to a group of about 70 of the region's risk professionals gathered in Rio de Janeiro for the two-day ALARYS 2014 conference. “We have to learn to understand risks are nothing bad; they exist within companies, whether good or bad. You have to accept that risks are there.''

The repeated characterization from risk management experts of Brazilian companies' lackluster approach to risk management presents the ultimate irony for foreign visitors who see the city of Rio preparing to take the world stage in 2016 to host the Summer Olympics, an international event requiring a comprehensive risk management plan.

As the preparation continues, hotels, sporting venues and an Olympic Village for athletes remain under construction, along with an overpass that's being added to a major highway running through the city. Still, there was no discussion or even mention of the risks surrounding planning and hosting the Olympics during the biennial ALARYS conference.

Marcelo D'Alessandro, director of Associação Brasileira de Gerência de Riscos, the Brazilian risk managers' group and a member of the Rio 2016 Organizing Committee of the Olympic and Paralympic games, said after the conference that the committee turned over all risk management responsibilities for the upcoming sporting games to the International Olympic Committee for budgetary reasons.

“There is always a fear of talking about the Olympic Games in Rio de Janeiro ... especially in relation to risk management and insurance coverage,'' said Mr. D'Alessandro, who also helped plan the agenda for last month's ALARYS event. Because of a confidentiality agreement with the IOC, risk management issues related to the 2016 Olympics were not discussed during the event, he said.

In his remarks during the conference, Mr. D'Alessandro said most Brazilian firms don't yet understand the concept of enterprise risk management and therefore have no such program in place.

Risk managers who work for large logistics and health insurance companies, respectively, in Europe and the U.S. said that developing an enterprise risk management program throughout an entire corporation takes many years, with collaborative efforts of many employees.

Despite sophisticated risk management practices, European and U.S. businesses sometimes struggle to understand the magnitude of their expanding risks, they said.

“We, as large companies, have a duty to educate the smaller companies, which often are our suppliers,'' said Carl Leeman, chief risk officer at Katoen Natie International S.A. and a director on the board of the Federation of European Risk Management Associations. “In fact, we need to go one step further and give them risk solutions.''

Katoen Natie is an Antwerp, Belgium-based logistics services company with operations in 28 countries and 11,000 employees. Each entity is responsible for its own risk management plan.

Uncovering the hard-to-identify risks often requires a risk manager to take colleagues out of the office to talk in a relaxed social setting, Mr. Leeman said. This has become part of the risk assessment protocols at Katoen Natie.

“You have to go out with people to find out about certain risks,'' he said. “After three or four beers, you get much more information.''

Carolyn Snow, director of risk management at Louisville, Kentucky-based health insurer Humana Inc. and the 2014 president of the Risk and Insurance Management Society Inc., said the path to an efficient enterprise risk management program at Humana has been a 15-year journey — and continues. Across the corporation with 52,000 employees, there are plenty of risks. As a government contractor providing Medicaid and Medicare health care plans, compliance is the No. 1 risk for the publicly owned company with $50 billion in revenue projected in 2014.

“As a government contractor, if we violate compliance rules, they can shut us down,'' Ms. Snow said. “If the government would shut us down, 60% to 70% of our annual revenue would be gone.''

Brazil comprises about half of the property/casualty insurance market in Latin America, but many firms still don't insure all of their key risks.

“CEOs will say, "We don't do insurance,''' Mr. D'Alessandro said.

Since 2010, Brazil's economy has sputtered, and it's only expected to grow by 1.5% in 2015. Corporate capital investments and consumer spending are way down, the nation's currency has softened compared with the U.S. dollar, and inflation stands at 4.5%.

Daniel Nobre, Brazil country manager at Madrid-based credit insurance firm Credito y Caucion, said the steady economic growth that the world's fifth-largest nation — and the biggest in Latin America — enjoyed from 2002 to 2010 has withered away.

“Today, everything has changed. All of the favorable economic conditions in Brazil don't exist anymore,'' Mr. Nobre said.

Despite the anemic economy, Brazil's $11 billion property/casualty insurance market has been growing. Helio Novaes, CEO of insurance brokerage MDS Brazil in Sao Paulo, an arm of Porto, Portugal-based MDS, said the insurance market is projected to grow another 9% in 2014. With an insurance penetration of only 1.8%, the property/casualty market in Brazil has plenty of upside.

“Risk managers should view their companies as a whole and figure out the best ways to mitigate and transfer their risks'' via insurance, Mr. Novaes said.