High growth rates in emerging markets pose attractive market potential for our portfolio company and private equity clients. The returns are potentially higher relative to more mature economies, but are subject to a higher degree of risk and volatility. Therefore, in the coming weeks we will complete a four part series on insurance and risk management issues in some of the most prevalent emerging markets, including: Mexico, India, China, and Brazil. 

We will focus our attention on the most common exposures faced when a portfolio company and/or private equity firm has operations and/or employees in these countries. Generally speaking, the exposures we will address for each country are as follows:

1. Your product is manufactured at a facility located in an emerging market that is owned and/or managed by your company
2. A contract manufacturer based in an emerging market is responsible for all aspects of the manufacturing process of your product, but they can’t or won’t prove that they purchase valid insurance 
3. Your employees travel to an emerging market for business reasons
4. You have full-time employees based in an emerging market that require health insurance benefits and/or Workers’ Compensation coverage
5. An acquisition is based in an emerging market
6. Directors and/or officers permanently reside in an emerging market 
7. Your product is manufactured in the U.S. and/or an emerging market and sold anywhere in the world
8. Your product is manufactured, sold, and intended for use in the U.S., but somehow ends up involved in a Product Liability lawsuit in a non U.S. court

Equity Risk Partners can work with your management team and our network of broker partners around the world to craft an insurance and risk management program to address these exposures. Serious problems could result for your company and/or management team if a suit is brought in a country in which your policy cannot legally respond. The most common ways that a foreign jurisdiction will impose their authority due to improperly placed/structured insurance include: fines, penalties, taxes, travel restrictions in the country in question, and imprisonment. 

There are also many non-insurable risks associated with doing business in an emerging market. For instance, emerging markets are more vulnerable to epidemics and natural disasters. Catastrophes and epidemics can severely delay economic development, creating/exacerbating poverty, political, and social instability. Typically, most residents and businesses in emerging countries are severely underinsured or uninsured. This happens due to a lack of income on behalf of buyers to purchase adequate insurance, an underdeveloped insurance marketplace that has a limited product offering, and/or a culture that doesn’t understand or see the value in purchasing insurance. Therefore, your company cannot assume that an at-fault third-party has collectable insurance and/or assets that can make you whole when a loss occurs.

In most cases, it is relatively inexpensive compared to U.S. standards to address your exposure to foreign suits. Also, your management team will be able to control all aspects of the insurance program regardless of where your product is manufactured or sold. We believe that controlling a global insurance program from the U.S. is just as important as placing the appropriate coverage.

Some insurable exposures in emerging markets require a local policy to be issued on your behalf. In 2008, Equity Risk Partners joined the Worldwide Insurance Network Group (WING) in order to establish a formal partnership with brokers based in over 60 countries. Our WING membership allows us to move quickly when a need arises, and the bi-annual WING conferences allows us to meet face-to-face with other members in order to discuss the policies that they have placed on your behalf. 

Because of our close relationships with global brokers, we are able to advise our clients as to the most practical approach to their specific situation and then bring both the foreign and U.S. markets together in a coordinated program. We also communicate regularly with underwriters around the world. In addition, we receive daily bulletins from independent sources relating to changes in the global insurance market, political and social conditions, and meteorological reports tracking and forecasting potentially dangerous tropical storm activity.

The subsequent White Papers on Mexico, India, China, and Brazil will culminate in another edition of the Equity Risk Partners’ Executive Advisory Series on September 23, 2009 at 4pm EDT. The intent of the advisory series is to provide you with critical tools and information about insurance and private equity issues. The Advisory Series call is completely free for interested parties, will last approximately 30-45 minutes, and will include a question and answer session. Both the transcripts and a recorded version will be available on our website after the event at http://equityrisk.com/executive_advisory_series.htm 

Vernon Veach is Senior Principal, Global Risk, and Josh Warren is Director, Client Service at Equity Risk Partners. Mr. Veach can be reached at 312-980-7851 or at vveach@equityrisk.com. Mr. Warren can be reached at 312-980-7853 or at jwarren@equityrisk.com. Equity Risk Partners is the only full service insurance brokerage and risk management advisory firm dedicated exclusively to the needs of the private equity industry and its portfolio companies. For more information, visit www.equityrisk.com.