Managing Global Market and Types of Risks - Essay Example

? Globalisation Globalisation Introduction Currently, a large number of businesses are expanding internationally to fit into the global economy. Global economy refers to merging of markets from different countries to form an international market. There are a number of factors that contribute to the existence of international business. The first is the degree of demand for a product across the world. The second factor focus on diversity in tastes and preferences and buying behaviour of consumers from in both the mother country and other countries. For instance, there has been an increase in the market of organic products all over the world in past years. Therefore, companies that engage in production of organic products will have a ready market all over the world. The third one is the removal of boarder barriers, such as import and export taxes, flight barring, and currency risks. However, transaction of business internationally has an impact on risks facing these businesses and in management of those risks. It is a fact that every business has risks involved in its operation. However, unlike local businesses where the business accountant or lawyer knows the risks to expect the global market is more complex and complicated in those different countries have different business environment. For example, a business in an industrialised county does not face similar risks and challenges in managing risks compared to those that a business in a developed country would face (Mclvor, 2000). According to a survey conducted by AON Company (2011), some of the risks that an international business would face are economic delays, regulatory changes, business interruptions, high completion, price risks, reputations damage, and cash flow risk, failure in supply chain, third party liability, and failure to retain the top talent. These risks are influence by the political diversities, cultural differences, legal issues, economic and financial issues, and differences definition of risks. In managing these risks, most international businesses prefer insurance despite the alternative methods of risk transfer and financing. There are a number of factors that would influence a business to opt insurance as part of their risk financing strategy, these includes authorisation, coordinated global insurance programme, compulsory insurances, taxation issues, the condition of local insurance market, and influences of reinsurers. Most international businesses use captives insurance in purchasing and managing their insurance portfolio. Globalisation Globalisation is a terminology used to describe the interactions and integrations amongst government, companies and people from different countries. In business, globalisation is into two parts which include globalisation of the market and globalisation of the product. Globalisation in the market is where distinct markets from countries all over the world merge to form a global market. There a number of factors influencing globalisation of the market. The first one is falling of border barriers whereby businesses are free to conduct business transactions across the borders. The second is striving to satisfy the taste and preferences of the consumers worldwide. For example, smart phone’s demand in the world has increased tremendously over the last few years. Therefore, forces of demand have led the smart phone company to become an international company. The last one is standardisation of product such that the products are acceptable worldwide. An excellent example of a company whose product meets the global standards is Coca-Coca Company (vogt, 2012). Production, packaging and distribution of Coca-Coca Company products allow it to fit in the global market. Globalisation of products occurs when a company from a developed country establish a production plants and start producing in a developing country. The developing countries mostly offer cheap labour, land and low start up cost. For example, outsourcing of cheap labour and technological innovations are becoming global businesses especially from India to USA. Businesses are increasingly engaging in transitions across borderlines, especially companies from developed counties. This has significantly changed the business environment, the products and productions processes. Engaging in international transactions has advantages and challenges. Therefore, international businesses should not only focus making profits, but also come up with strategies on how to handle business risks (Lonsdale et al, 1998). According to Platts (2000), there are arguments that global risks are similar to domestic risks, which is wrong since countries are different from each other. For instance, not all governments allow foreigner to own land in the country. Therefore, a business that wishes to design a risk financing strategy should consider a number of factors. The first one is the difference amongst countries based on the government policies, culture and politics. The strategies need to be flexible to accommodate diversity in cultural and political nature worldwide. The second one is different governments have different approaches towards international businesses. Lastly, the business should understand currency exchange and currency risks. For instance, international businesses are at the risk of potential losses as a result of an unstable currency exchange rates between the currencies in the foreign country and the country of origin. Managing global market Over the years, international businesses have been operating unnoticed and rarely did the media report off them unless they are involved in crises. However, currently with advancement in technology and increased means of passing information, information on globalisation is all over the world. International businesses, therefore, need to be very careful of their actions in one country since it might affect its operations in other countries. For example, an international business from USA setting up a production industry in a developing country may implement occupational health and safety standards as per that country, but instead of benefiting the company reputation is damaged. This may happen whereby regardless of the company attaining those standards USA government may still find them poor in relation to western standards. Therefore, a well designed risk financing strategy that consists of all these factors is necessary in running a business globally (Venkatesan, 1992). Risk financing strategies are measurements that organisations need to take to achieve in transfer of risks. This may differ between the non-profit organisation and private sectors because private sectors aim at maximising profits. It is also important for an international business to know its position in the global market compared to other leading global firms. This information helps it to effectively compete and strategise on its goals. A better position in the global market in the global market means the company’s profits are high, and it has an outstanding reputation. In such a case, the organisation may take advantage of its outstanding reputation to exploit more imperfect market globally (Welch et al, 1992). Type of risks There are five main risks that face the international business. The first one is political risk where the business may experience unstable economy, unexpected changes in policies, corruption, poor infrastructures, terrorism or hostile relationship with other countries. For example, terrorists may target a nuclear power station with the aim of a terror attack explosion. The second is geographical and environmental risks. Geographical and environmental risks include natural hazards such as earthquakes and floods or man-made hazards such as air pollution. The third risks and corporate social responsibility which consists of child labour, oppression, land grappling and depressing regulations. The fourth is media power and influence. Opinions of media about an organisation can either positively or negatively influence the operations of accompany. Therefore, international businesses need to avoid the media or utilise it as an advertisement tool. The last possible risk is cultural risk, where the organisations need to appreciate the many and distinct cultural believes in different countries. For example, to start a business in China one needs to learn Chinese culture, otherwise, there are limited chances of the business doing well (Williamson, 1975). Alternative risk transfer Alternative risk transfer is the application of techniques, other than insurance, with the aim of achieving the same results in the transfer of risks. These techniques enable companies protect themselves from risk by transferring them to other entities in the market. Introduction of alternative risk transfer began in 1990s. During this period, insurers and reinsurers offered high and unreasonable premium living the companies with no other option, but to find new ways of risk transfer. These techniques include insurance-linked securities and reinsurance sidecars, use of catastrophe bonds to secure risks, use industry loss warranties and contracting and reinsuring through transformer vehicles (Beck, 199). Global market insurance market Most of the international businesses prefer a combination of as many insurance bodies as possible because like any other company Insurance Companies can as well collapse. The global insurance market offer these since it consists of a combination of insurance, reinsurance, captives and risk management companies. There are a number of reasons as to why international businesses would go for insurance rather than alternative risk transfer. The first one is global insurance market offer coordinated global insurance programmes. These programmes come up with global policies that cover most of the risks indifferent countries. In other words, this approach establishes a harmonised cover on all the risks that an international business would face in a centralised manner. Although, in the real sense, the company’s insurance written cover is under the programme, the cover is with different insurance companies combined under one body. This benefits the client through transparency and easy access to various insurance covers. The principle of having a single body responsible of insuring is effectiveness especially, in responding to a claim (Skipper, 2007) The second is authorisation which refers to the legality for foreigner insurance to writing an insurance contract in a certain country. It would be beneficial for an international business to understand that, not all the countries that allow insurance issuing from foreigners insurers. Depending on the government this law may be lightly or strictly followed. Normally, the terminology used is that of “admitted” or “non-admitted” insurers. Authorisation strictness is mostly amongst the developing countries with the aim of encouraging development of their own domestic insurance market. On the other hand, it would be wrong to assume that development countries are admissive to authorisation. For example, USA is extremely strict in controlling operations of foreign insurance companies in the country (Lofstedt, 1998). This means that it is only legal to insure if the insurer is amongst the admitted companies. Therefore, an international company should consider it vital to familiarise with the regulations relating to authorisation in all countries in which it operates to intend to operate. However, some international companies still purchase their insurance cover from foreigners, irrespective of the countries in which they are operating. Organisations who adopt such a strategy will frequently supplement this central programme with some insurance purchased from the local market. The third one is that, in some countries, it is compulsory for an organisation to insure certain risks. These requirements depend on the insurance cover and the financial implications to the company. Citizen’s protection was the core reason that led some countries to enforce laws that require certain insurance covers compulsory. For example, a country may impose that all companies operating in the country have to insure employee’s compensation, fire insurance or transport insurance for goods transported on truck. The fourth factor is on taxation where the tax imposed on a company may be discriminative or non-discriminative. Most government uses discriminative taxes to bar foreign insurers who wish to operate in their country. For example, tax rates for foreigner may be higher than those imposed to locals. They may be also subjected to excessive taxation on profits (Naime, 1997). The basic principle is to increase operational cost for foreign insurance companies compared to the local insurance companies. Non-discriminatory taxes are compulsory taxes to all insurance companies regardless the company’s status of origin. In this case, both local and foreign insurance companies pay the same tax charges. The last factor that might make an international business opt to insure is the condition of the local insurance market. In case of a poor insurance market, considering most international companies come from developed countries, the organisation may prefer the global insurance market. Common in the purchase of insurance International companies need to be rational in purchasing and managing of insurance portfolio. In this case, most international businesses use an analytical method in purchasing the insurance portfolio. The method consists of a number of steps that the business needs to consider. The first is identifying the risk facing the company. Risks facing an international company vary from one country to the other. Therefore, it would be wrong to assume that domestic ricks of a certain country are same to the other. The second is analysing the likely hood of a risk occurring. This may be influence by the political stability of a country whereby the probability of risks occurring in a politically stable country is lower than in an unstable country. Therefore, businesses in a politically unstable country need to purchase insurance to cover risks that would result from political violence (Cvetkovich, 1999). The third one is evaluating the effectiveness of control measures. For instance, development country such as USA and UK has provided insurance agencies to deal with export risks. This insurance covers most of the risks associated with exportation which includes natural hazards, foreign exchange or contract cancellation. Purchase of insurance cover through export insurances agency is also relatively cheap than in the open market. However, an organisation from USA needs to understand that other countries have different practise. Therefore, the export insurance cover by the agency is not effective in other countries. The fourth step is considering the risk residuals that may exist even after implementation of the control measures. Purchasing an insurance cover from an agent or the insurance company does not mean total safety. The insurance companies just like any other company face risks either on local operations or international operations. Therefore, insurance companies need to consider reinsuring the risks with a reinsurer. Finally, the organisation needs to analyse the financial implications on risks management. In a perfect market, the insuring cost should not exceed the cost the company would incur if the risk occurred. Therefore, the company accounts for the cost of insurance premiums before purchasing insurance portfolio (Douglas, 1982). The other commonly used method in the purchase of insurance portfolios is the captive insurers. These are insurance corporations owned by a noninsurance mother company to provide insurance cover for the mother company. The first captive company was started in 1960 following a hard market period. Hard market in this context refers to a period when insurance cover premiums are exceedingly high. The companies that purchase insurance cover in large amounts found it cheap and efficient to create their own insurance company (Green, 2000). Reinsurance Reinsurance is an extension of an insurance cover. Most of international businesses, including the large insurance buyers, do not clearly understand the role of reinsurance in the global market. Therefore, focusing on how reinsurance influence the availability of insurance cover and their prices is vital to international businesses. Although, some large insurances companies offer both written insurance covers and reinsurance, reinsurance does not directly write any insurance cover. In general, there are no contracts involved while purchasing reinsurance cover. However, since reinsurance is dynamic in nature, a number of factors influence its existence. These factors include financial and economic factors, political instability and environmental changes. As mentioned earlier that reinsurance is an extension of insurance, therefore, an insurance purchases reinsurance cover for a reason. Fundamentally, insurance purchase is the transfer of financial risks to another party. Therefore, when insurance companies buy reinsurance, the same principle is operational (Douglas, 1982). However, there are a number of factors that determine the amount and price of the reinsurance cover. The first one is the insurance company desire to cover large risks. For example, the risk an international business would face in the market. The second one is the need of an insurance company to cover more risks than it can accommodate on its own. This mostly in the developing countries where the demand of insurance cover is more than the existing insurance companies can cover. Therefore, the insurance company would purchase reinsurance cover to create room for extra cover. The third one is the need for protection from financial exposure. Lastly, the insurance company may need to stabilise its operations (Nairne, 1997). There are a number of reinsurance factors that would contribute to availability and price of writing insurance cover in the global market. The first one is the cost of reinsuring which is mostly determined by the extent of losses and the number of Reinsurance Company available. In case of few losses, the reinsuring cost goes down, and more insurance companies opt to reinsure. This increases the profits of the reinsurer attracting other reinsurance providers into the market. Increase in number of reinsurance providers results to competition and a farther drop in price since every one of then want to sell. However, greater losses mean high reinsurance premium and consequently the same case with insurance premiums (Lonsdale et al, 2000). The second one is the availability of reinsurance in the market. When reinsurance is readily availability to the insurance companies, insurance covers are likewise readily available to the international businesses. Although, insurance type and amount of losses insured significantly affect the insurance market, the overall volume and ease in acquiring insurance is as well vital. On the other hand, in case of scarcity in the availability of reinsurances, consequently is the availability of the insurance covers. Finally, the impact of terms and conditions imposed by reinsurers significantly affects the global market. Originally, reinsurance companies were mostly concerned on risks associated with environmental pollution and employees’ liability. However, due to competition and increase in losses these companies now reinsure practically all types of risks (Lonsdale et al, 1998) Conclusion In conclusion, this paper gives a clear description of the global market, risk facing business in the global market and management of those risks. It also gives a clear picture of business in the global market and management of those risks. It also gives a clear picture of globalisation, international diversification and strategies in managing global market. The need of business in developed countries to become global is characterised by their desire to satisfy the demand of a certain product, production of standardised goods and removal border barriers. Although globalisation has benefits, there are risks that face business in the global market. Influence on these is mainly based on political, culture and environment differences amongst developing countries. In risk management, it is clear why most international businesses prefer insurance despite the alternative risk transfer methods available. This does not mean that these companies are not exposed to financing technique, but remarkably few of them fully trust financing techniques to operate without insurance cover. Insurance companies operating in the global market face the same challenges and risks as international businesses. This pressures directly impact on price and availability of insurance. Therefore, the insurance companies need to reinsure in the price and availability of insurance. International business must, therefore, always keep abreast with developments in the insurance market. International businesses need also to determine the method of purchasing insurance portfolios with respect to premium prices and the amount it needs to ensure. The common method in purchasing insurance portfolios, involves analysis of risk through a four step process which includes risk identification, analysing, controlling and financing. In addition, the large multinational companies have owned insurance companies referred to as captive insurers. References Vogt, C. (2012). What is global standardisation in marketing? Retrieved from http://smallbusiness.chron.com/global-standardization-marketing-25939.html Skipper, H., & Kwon,W. (2007). Captive Insurance Companies. Risk management and insurance: Perspectives in a global economy. (pp 329-324), Malden: Blackwell Lofstedt, R., & Ortwin, R. (1998). The Brent spar Controversy: An Example of Risk Communication Gone wrong. The Earths can reader in risk and modern society. London: Earthscan Nairne, S. (1997). Political Risk on shifting sands: an export Credit agency’s view. Issues concepts and applications riverside CA Beck, U. (1999). World risk society. 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