You are as strong as your weakest link. How do you defend your companies against attacks, mitigate risks or prevent negative impact on your balance sheet in today’s world of cyber-crime, fervent litigation, massive losses due to natural disasters or changing political climates? We don’t have a crystal ball, but we do know the world is fraught with uncertainty, making it particularly difficult for companies to assess and mitigate their weakest links, especially those impacted by uncertain U.S.-China relations.
U.S.-CHINA GEOPOLITICAL DYNAMICS
January 15, 2020 marked the historic signing of the first phase of the U.S.-China Trade Treaty.However, change is constant. Many differences drove the intricate codependency and conflicts between the U.S. and China. The rise of China’s economy lifted hundreds of millions of people out of poverty at an unprecedented scale and speed. This rapid capitalistic movement created a generation of successful entrepreneurs with a mindset of “corporate immortality.” However, this dramatically changed as China entered into a slower economic growth and global tension for power grew in the last 3 years.
In the early 2010s, global capital outflows of top Chinese conglomerates peaked and fueled industries and geographies beyond the nation’s Belt and Road Initiative (BRI). Now U.S.-based Chinese corporations face short sales of assets, M&A litigations, political investigations and capital crunch. In the last five years, the financial system in China took a hit and China imposes extreme capital control for outbound investment. Those remaining Chinese companies operating in the U.S. experienced a huge setback when U.S. authorities used legal compliance to show its prowess and overthrown the competitive edge that Chinese enjoyed for many years.
THE IMPACT OF THE TRADE WAR
Since Xi’s “Made in China 2025” initiative, China realized it cannot afford to depend on U.S. technology and began to outsource their supply chain to Japan and Germany; or, opt to develop domestic patents in a race to the top for tech dominance. Companies in China moved their factories to other regions in Asia to diversify and increase supply chain resilience. Never before have Chinese companies taken regulatory compliance more seriously. The SEC’s focus on individual’s culpability presents a unique personal risk for Chinese executives operating in the U.S., who are now more educated on the imperative importance of sound corporate governance and risk management.
GLOBAL INSURANCE MARKET
The hardening insurance market continues into 2020 as insurers charge more premium for deploying their capital. They constrict the limits offered as global natural catastrophes and an increasing frequency of massive legal verdicts continue. Property, Umbrellas, and D&O are hit hard.
Additionally, the uncertainty of the next cyber exposure to loss and climate change unpredictability affect investment strategies, claims reserving practices and underwriting. Business leaders must begin their 2020 strategic planning, adjust cash flow estimates, and update business continuation plans. Having direct access to Lloyd’s of London with exclusive reinsurance facility is important for even middle market Co’s. As Brexit is confirmed, it will be interesting to watch the future of Lloyd’s footprint and how China is going to play a role with its own ambition to grow independence in the financial sector. However, the risk management practice is still developing in China, with a limited domestic talent pool to handle the impact of increasing global demand. . There is huge potential for underwriting and risk management talent in China future.
The weakest link is not always easy to spot in each company, even for the most astute business owners. It is risky to have false comfort in assumptions based on past experience. You can no longer ignore the need to take more frequent and deeper assessments of risk control protocols, or even as simple as executing well-crafted plans. As the ancient Chinese proverb says, “crisis is made of of danger and opportunities.”
May 2020 bring you success and abundance beyond imagination.
Claudia Lin Margolis is U.S.-China Practice Team Leader at Lockton Insurance Brokers. Learn more at lockton.com/offices/los-angeles.
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