Open for Business
Ten years ago, companies like Samsung, CEMEX, Embraer, Lenovo, Haier, Modelo and Infosys were unfamiliar names in the global marketplace. Yet, today, they are leaders in their respective industries. Did you know that in 2010, 91 of the Fortune Global 500 were from emerging markets compared with 20 in 1995? Most of the companies are multinational corporations that have significant insured locations in developing markets, either through acquisition or organic growth. And, they are in a better cash position to expand their global presence than their developed-world counterparts. The reality of the new corporate world emerging from the financial crisis of 2008-2009 is that competition is truly global. That reality will continue to accelerate well into the foreseeable future. By the year 2040, half of the world’s gross domestic product will originate from emerging markets.
(Source: Goldman Sachs Global Economics Paper 99, Dreaming with the BRICs: The Path to 2050)
How did this happen? A basic step: knowledge transfer. In his book, Emerging Markets Century, Antoine Von Agtmael explains that multinational companies or organizations in developed markets planted their seeds through foreign direct investment. And a confluence of other economic factors took place: the transition from centrally planned to market-based economies, the privatization of industry as a means to eliminate hyper-inflation in Latin America, government economic policies that got their “houses in order” eliminating budget and trade deficits, the globalization of skilled workforces, and the phenomenon of outsourcing. Emerging market companies leveraged these factors through visionary leadership willing to take business risks that their counterparts in developed countries did several decades ago. These risks were taken out of necessity to survive as fierce competition in those markets arose as a result of those factors.
Bret Ahnell, senior vice president and FM Global’s western division manager, says: “Just as these developing market companies demonstrated early visionary leadership to exploit changing economic factors, they must now demonstrate leadership to proactively invest in protecting their physical assets in these countries where loss prevention is still often considered visionary.”
“We have observed,” says Marc Ragazzi, vice president, operations manager for FM Global’s Latin America operations, “that successful companies pursuing global growth have started regionally, where similar language, culture, as well as bilateral trade agreements present in Latin America increase the chances of a profitable investment.”
“A few countries in Latin America have indeed aligned their internal economic and political structures in such a way that promotes the global enterprise,” says Jose Figueroa, FM Global’s operations vice president and manager, global services. “More legal certainty and less government intervention in international trading, added to cleverness in conducting business, has resulted in the current trend toward globalization from many companies in the region.”
This new reality has opened up opportunities for property and casualty insurers in these markets. But with opportunity comes challenge, the most critical one being how to penetrate these markets while continuing to offer and build upon the services for clients’ existing insured locations. Dennis Bessant, vice president, operations manager, Asia operations, says, “The only borders that exist for us now are those that exist in our organizational mindset. However, the barriers and stakes to becoming a player in the global commercial property market are still very high. Top line growth is not the mandate in the short-to-medium term. Servicing existing corporate clients in developing markets is the first priority and ensuring they can achieve well-protected risk with certainty is always the principal desired outcome.”
FM Global already covers its clients’ global needs in more than 130 countries through its WorldReach® network, but to address indigenous opportunities, it must either obtain a license in those countries and/or change the nature of the relationship of its WorldReach partners.
“We have been blessed with a rush of new business in Latin America and this has added challenges to our relationship with our WorldReach partners,” says Figueroa. “This is especially true in terms of compliance, as our legal status in the region, except Mexico, is that of a reinsurer. In these countries we are migrating from a traditional ‘fronting’ business model where our partners would only provide insurance services to our connected business, to one where they act in a different role with those indigenous clients.”
Whether obtaining a license or changing the nature of the business, these decisions are not simple. They require a significant amount of research and planning, both short- and long-term, to make them happen. The execution of those decisions can take years and cost millions of dollars. One must be doubly sure after committing to one or the other.
Over the past half a dozen years, FM Global conducted market research outside of North America to develop a thoughtful framework to identify and effectively address this situation. The main premise of the protocol is to service clients first, and not compromise that service to address new business opportunities in developing markets.
“Our mutual structure gives us a unique client focus that drives consistent service to our multi-national clients,” says Ragazzi. “Over time, this approach has developed opportunities for new business in developing markets through unsolicited client testimonials.”
“We never enter a market by first sticking a flag in the ground and declaring that we are open for new business,” says Ahnell. “To the contrary, our sole focus in any new market that is attracting our multi-national clients is to ensure we provide them with the same level of quality service they receive in their country of domicile.”
Adds Bessant, “Our mutuality allows us to take a long-term view when it comes to market-entry scenarios.”
The Market Entry Protocol is a series of steps that allows FM Global management to make the most informed strategic decisions in determining whether or not to obtain a license, partner with WorldReach partners on indigenous business, or maintain its current status. There are four critical steps to that process.
Step 1: Crow’s Nest Analysis
The crow’s nest is a reference to the look-out poised aloft in sailing vessels, a point of reference that would give the captain insight about what lay ahead, as the elevation allowed the ship to look out onto the earth’s curved surface. Trying to see what’s coming by simply standing on deck limits the vision. To take advantage of the view from further up, FM Global researches a half dozen key economic and business statistics each year to determine whether a country is experiencing accelerated development. The result is typically a list of no more than half a dozen countries to further explore.
“In the past,” says Ragazzi, “growth has been a result of multi-national companies investing in Latin America bringing with them the highly protected risk approach. In recent years, we have seen some local companies following a similar building safety and loss prevention approach to become competitive abroad.”
“Many companies in the region used to look at their insurance needs on a localized basis,” says Figueroa. “They took a very narrow approach, many times not even able to obtain gap or DIC coverage in their home countries for those subsidiaries located in other jurisdictions. Financial or internal requirements brought on by expansions, acquisitions or green field projects have prompted these companies to take on a more sophisticated risk management philosophy. We now have the ability to understand the complexity of global property insurance programs.”
Step 2: Initial Assessment
For those countries identified, the next step is to conduct some desk research on a handful of criteria that impact connected business (insured locations of existing clients) and the indigenous business opportunities and challenges. The criteria include items such as the connected business premium growth, political stability, market size and growth, the cost of licensing, local competition and distribution channels. The result is a strategy that can range from licensing to holding steady in the current position. The change in strategy can come from either the connected business assessment or indigenous business assessment or both. In 2008, in Mexico, for example, FM Global obtained a license primarily due to the significant growth in connected business.
Step 3: In-Depth Research
The result of the initial assessment may warrant considering a change in strategy in the local market. If that is the case, then further research is needed to validate that recommendation. A research firm is hired to survey the local market to understand the local buying habits, risk management mindset, cultural practices and marketplace. The final analysis provides greater insight for developing a robust strategic plan.
“We carried out market research in Brazil and Mexico in late 2010,” says Ragazzi, “confirming that we had significant opportunities in these two countries. By listening to our clients and partners, the research has been extremely valuable in developing a realistic and fact-based three-year plan.”
Step 4: Creating the Business Plan
A cross-functional team is formed between staff departments and the operations responsible for that geographic territory to review all research conducted and develop a business plan. The plan consists of operational, legal, financial and marketing goals, strategies, and resource requirements to ensure appropriate execution.
“Our biggest challenge remains compliance with ever-changing regulatory requirements including reinsurance rules, policy language, taxes, etc. Our clients perceive FM Global as having the competence and capabilities to deal with these issues,” says Figueroa.
Bessant agrees. “FM Global is one of very few global property insurers today with the necessary geographic reach and experience; there is a certain sense of security for clients who can access both consistent, compliant risk transfer coupled with world-class leading loss prevention risk identification and assessment in countries far away from the corporate office, where in many cases risk management is still at an incipient stage of development.”
Over the past half dozen years, FM Global has followed this protocol in researching more than 40 countries, with the greatest attention given to the BRIC (Brazil, Russia, India and China) countries. An example of how this works can be demonstrated with China. In 2005, China was identified as being a potential future core market through conducting steps 1 and 2. However, the challenges associated with writing indigenous business in that country were enormous: evolving licensing regulations, a limited risk management mindset, and several significant cultural barriers. Market research was conducted in 2006 and 2007 to understand how to be best positioned for market entry. This led to a business planning team formed (step 3) to develop the plan, determining the appropriate business strategy based on research and licensing requirements.
Following local insurance regulations, FM Global first established a representative office in 2007 and has taken initial steps toward the ultimate goal of establishing a licensed insurance company.
However, a critical component of the business plan is what to do about the cultural and localization challenges. This is where cultural intelligence enters the picture; FM Global’s experience with existing clients with insured locations in various countries and the existing, on-the-ground staff aid this effort. For example, the context of doing business between the United States and Brazil is radically different.
While FM Global’s main premise, the majority of loss is preventable, is a globally applicable concept, how to communicate and influence risk managers and others in emerging markets is still a major challenge. If McDonald’s, one of the most recognized American brands, can be successful with localization in India with products such as the “Chicken Maharaja Mac,” then anyone can succeed. (Note: McDonald’s mission, stated in their annual report, is “a leading share in the globally branded, quick service restaurant segment”; there is no mention of hamburgers). Ultimately, it comes down to having the right product, delivered by the right people, in the right place, at the right time.
To that end, FM Global and its various departments have collaborated with local operations to identify and plan how to educate prospects on raising their level of awareness and understanding of property conservation. In addition, a codes and standards group educates and influences government entities that play a role in establishing and modifying local jurisdictional building codes. This helps increase the level of risk management sophistication so that developing market companies can consider the merits of FM Global’s offering. More importantly, it helps level the playing field for its clients in these markets as they compete with emerging market companies. Internally, it also helps clients attain a consistent risk management philosophy across global operations.
“Companies often enter developing markets to gain a sustainable competitive cost advantage,” says Ahnell. “Investing in loss prevention should not be in conflict with that goal. Today, companies can build a highly protected facility in most developing countries at a comparable cost to that of a developed country.”
The march to globalization is inevitable. In the words of former United Nations Secretary-General Kofi Annan, “It has been said that arguing against globalization is like arguing against the laws of gravity.” FM Global is on its way to dealing with current and future challenges related to globalization. Most importantly, the company follows its clients to serve their global needs. Then, it looks at how to address indigenous opportunities without impacting connected business. The Market Entry Protocol serves as an objective framework, carefully considering client needs and remaining watchful for new opportunities in developing markets.