On the Road to Latin American Opportunity

As a large region with solid prospects for long-term growth, Latin America continues to gain in popularity as a market for many U.S. companies.

Exporters to this region, however, can face significant challenges when it comes to getting their goods to their final destination. Countries in Latin America often face infrastructure issues, crime and government corruption, putting those goods at risk of physical damage, theft or other loss.

Companies exporting to these markets need to carefully research the risks and implement loss control measures to help reduce the potential for losses. With knowledge of the risks and of the terms of the sales contracts, agents and brokers also can play an important role in helping their clients obtain the appropriate insurance and control their losses.

Latin America: Balancing Opportunity and Risk Exposures

Latin America is an increasingly important market for many U.S. companies. In just the last five years, exports to the region have increased dramatically. Exports to Mexico, the United States’ third largest trading partner behind Canada and China, rose 56 percent between 2003 and 2008, according to figures from the U.S. Commerce Department. Exports to Brazil, the world’s 10th largest economy, were up nearly 300 percent in that same time period.

In particular, Brazil, Latin America’s largest economy, has attracted attention in recent years as a particularly promising prospect for long-term growth and is often linked with Russia, India and China (BRIC) as one of the world’s top emerging markets.

But companies that export to the region must keep in mind the risks as well. Goods shipped to Latin America are at risk of being lost, damaged or stolen along the way.

Hijackings are a significant and growing problem in Mexico and Brazil. In Mexico, one of the biggest markets for U.S. goods, about 40 percent of losses are the result of hijackings, and 30 percent are the result of damage from roadway accidents. In Brazil, the loss breakdown is similar. About 35 percent of the losses are from hijackings while 30 percent are the result of accidents on the road.

In Mexico, even though the number of hijackings has not increased much, the amount of money lost because of them has jumped 50 percent over the last several years, according to the Mexican Association of Insurance Institutions (AMIS). Sixty-five percent of hijacking events take place on the roads around Mexico City and Estado de Mexico, according to Camara Nacional del Autotransporte de Carga (CAMACAR).

In Brazil, the number of hijacking has held steady over the last few years at about 12,000 events per year, according to Agencia Nacional de Transportes Terrestres (ANTT). But it is interesting to note that 98 percent of these events happen within 150 kilometers of Sao Paulo, the nation’s capital.

Other Latin American countries, such as Chile, do not have as much trouble with hijackings due to heavy local law enforcement aimed at providing safe and secure transport corridors.

Hijackings are often committed with inside or official help. Customs officials as well as off-duty or former police officers, for instance, have been prone to corruption and have been known to help criminals gain access to valuable items arriving in ports. Drivers of trucks as well as their transportation companies are also frequently implicated in hijackings.

Although hijackings are a concern, many losses are simply the result of damage that takes place during shipment. Goods are at a much higher risk of damage in Latin America because the roads are often in poor condition and can be treacherous. Aging and inadequately maintained trucks compound the problem. That combination often leads to a high incidence of accidents in Latin American countries.

In addition to the possibility of damage in transit, there is also the risk that goods will be damaged at the ports, where they are sometimes stored improperly. One common type of loss, for instance, is water damage to electronic devices as a result of improper storage at ports or as a result of leaks in poorly maintained trucks.

The damage or theft of goods can result not only in a potentially significant monetary loss, but also in the loss of a company’s customers and market share if buyers decide to turn elsewhere for their needs.

Controlling Risk to Capitalize on Market Opportunity

Although the region has its unique risks, companies can take steps to minimize the potential for a loss.

It is important, first of all, for exporters and their agents and brokers to have a clear understanding of the terms of their sales contract. Incoterms are standardized definitions used by the global shipping industry to provide a common framework for issues such as control of goods and financial responsibilities. These terms will spell out exactly who has responsibility for the goods and at what point that responsibility changes hands from the seller to the buyer.

In Latin America, the buyer often assumes responsibility for the transportation of the goods. But in other cases, it is the seller who is responsible for the transportation of the goods.

The key point is for the exporter to understand the Incoterms of the agreement and to know at what point in the transaction the risk has been transferred to the buyer.

For exporters who have responsibility for the transportation of the goods, several preventive measures can help minimize the risk of a loss.

Close attention to security measures can help reduce the risk of hijackings. For instance, companies should:

• Carefully screen transportation companies and the drivers they hire. Particularly critical are background checks on the drivers, who sometimes have criminal backgrounds. In Mexico, for instance, 80 percent of hijacking incidents are inside jobs pulled off with the help of the transportation company or the trucker transporting the goods.
• Meet with local security providers to get a better understanding of the products and services available to protect shipments. New technology such as satellite security services and GPS can be effective tools in reducing the risk of a hijacking.

To reduce the risk of damage to their goods, exporters should:

• Make sure their products are well packaged. Products may need extra protection, additional cushioning and even modifications to packaging to protect them from water damage for their journey into Latin America.
• Ensure their transportation company is following appropriate safety procedures. Be sure trucks are well maintained and drivers are not driving too many hours, which can also raise the risk of an accident.

Companies can gain additional, expert insight into local risks by working with local loss control experts. These local resources can also provide assistance in monitoring loss trends to gain a better understanding about the most common and most costly losses.

Insurance is another important tool to help companies manage their losses.

For companies transporting goods overseas, ocean cargo policies are available while domestic transit policies are available for inland transit. These types of policies typically provide “all risk” insurance and can be written monoline rather than as part of a package.

Agents and brokers also need to know whether the country of destination requires locally admitted insurance. If so, insurance must be purchased through an insurer that is admitted in the local market. If not, the insured may be unable to settle its claim.

Although goods shipped to Latin American markets are at risk of being hijacked or damaged while in transit, the opportunities are nevertheless compelling. By working with an insurer that knows the Latin American markets and by taking steps to tighten security and safety protocols, companies can reduce the potential for a loss and take advantage of this growing market.