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Thiago Tristão

Risk management: how to mitigate financial losses

If we stop for a few minutes to analyse the obstacles that stand in the way of corporate projects, we should emphasize that not all risks that may surface along the way get due consideration. The COVID-19 pandemic showed even the more robust of companies that anything and everything can change overnight; after all, you can’t be in charge of everything. Some circumstances will always elude control.

In March this year, when countries such as Brazil and India faced high rates of transmission and rising casualties during the second wave of the novel coronavirus pandemic, a 200-ton-plus vessel ran aground in the Suez Canal, between the Red Sea and the Mediterranean, blocking passage for other ships that supply Asian and European markets. With losses in excess of US$ 10 billion, the Ever Given greatly hindered the global supply chain, leading to depletion of product and consumer good stocks and increased freight rates.

In addition, other ships traveling that route had to change course, increasing delivery times and, consequently, fuel consumption. Such developments caused astronomic losses, bringing challenges to companies such as a worldwide giant of the food sector, whose ships, laden with coffee containers, could not continue on their journey to the processing plants.

Two years prior, in Brazil, a historic trucker strike that lasted eleven days brought truck delivery of merchandise and commodities to a screeching halt, affecting staples and hygiene products, fuel, cooking gas, medicine, and other goods.  The rally happened in May 2018, causing the GDP (Gross Domestic Product)  to retract by 3.34% that month. With the economy in a downswing, indicators showed a drop of 10.9% in industrial production, approximately 0.6% in retail sales, compared to the previous month, beside a rise of 1.26% in inflation, acknowledged on the next month, according to information from the Instituto Brasileiro de Geografia e Estatística - IBGE  (Brazilian Institute for Geography and Statistics), Instituto de Pesquisa Econômica Aplicada - IPEA  (Brazilian Institute of Applied Economic Research) and the Instituto Brasileiro de Economia - Ibre/FGV2 (Brazilian Institute of Economics). The service sector also had negative results, with a drop of 3.8%.

Analysing both of these recent events, we can highlight the importance of corporate leaders who are prepared to step up and seek out a company specialising in risk assessment to help map and mitigate unexpected risk. With the level of interconnection that undergirds economies worldwide and their many supply and value chains, we see that it takes but a single event to negatively impact global markets, disrupting the flow of product delivery logistics and harming end consumers, slashing the value of stocks in the financial market, and setting off adverse events that may be experienced over the course of 12 months or longer.

We learn from examples, but mainly from past mistakes. This critical stance has allowed humanity to evolve, by developing new ways to deal with old risks. This is a constant process; but the fact is that more observant people can anticipate scenarios and prepare to face crisis situations less hurriedly, minimizing impact on businesses and operational safety. Nowadays, there are companies renowned for excellent performance in risk assessment and loss control, which design programmes to manage such risks, at a global scale. Prevention is the best solution to avoid unpleasant disruption and other issues, and the purpose of risk management is to avoid possible financial losses and even corporate reputation damage.

It is important to highlight the need to pay attention to the quality of coverage you hire, as it is to trust the insurance company you’ve selected, and always seek out companies that can demonstrate expertise in the relevant sector; likewise they should evidence a traditional bent, which is to say, a years-long, if not decades-long commitment to the sector, have operations running on numerous fronts, and maintain a presence in several countries.

By Thiago Tristão, Corporate Risk Vice-President at MDS Brazil & CEO Brazil at MDS Reinsurance Solutions 
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