Hello there, Please find the below picture for the questions to answer. The word

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Hello there,
Please find the below picture for the questions to answer. The word limit is 500words so please devide on to the number of questions, you may for example use more words in one questions than the other which is fine. As long as it 500 words in total to answer all the questions. Not 500 words for each question. Hello there,
Please find the below picture for the questions to answer. The word limit is 500words so please devide on to the number of questions, you may for example use more words in one questions than the other which is fine. As long as it 500 words in total to answer all the questions. Not 500 words for each question.


sa Font Paragraph Area 5- The value of insurance as a risk transfer mechanism 1. 2. 3. 4. 5. Should Multi National Corporation's use insurance for risk financing? If not insurance, what alternatives are there? Can you consider why insurance may be attractive? Can you consider why insurance maybe unattractive? Consider introducing real world examples here to support you answers?

Explanation / Answer

Ans:

1. An MNC is exposed to various kinds of risks in different economies. Some of these risks are:

MNCs undertake country risk analysis to understand the potential impact of a country’s business environment and policies on the cash flows. The political risk factors are- attitude of people of the country towards imported products, Government policies, bilateral relations of nations, bureaucracy, corruption etc. MNCs also face financial risk because of the financial risk factors like current state of the country’s economic conditions, country’s economic growth indicators like interest rates, exchange rates, inflation etc. MNCs use different techniques to analyze the country risk and decide on the risk mitigation. For example they may use a checklist approach under which each country is assigned a risk rating based on different parameters and risk weightage.

MNCs decide on the risk mitigation based on the country risk through different tools and techniques. Insurance is one of the key techniques to mitigate the risk. MNCs should use insurance as risk mitigating tool. Insurance offers a wide variety of protection plans for different types of risks. In addition host country or several international agencies offer different investment guarantee programs to various forms of country risk.

2. Some of the other alternatives are:

- Use a short term horizon- focus on recovering cash flows quickly

- Supplying unique products or technology which is not available to the host country. This would create a sort of dependency on the MNC for that particular technology. For example defense technology

-Borrow local funds- Lenders in order to protect their interest would request the government to have a favorable policy.

- Hedging mechanism- To mitigate the exchange rate fluctuation and interest rate risk MNC should use hedging mechanism.

3. Insurance may be attractive as it is an efficient tool to cover several risks. It can be effectively used along with other risk mitigating techniques to cover the overall financing risk. For example insurance offers protection against natural disasters, loss caused due to accidents etc. It offers flexibility and premiums are based on the coverage of risks and underlying assets.

4. Insurance could be unattractive due to higher premium payments and challenges in claims settlement. There can be harsh conditions for claim settlement and it may take a longer period of time. There may be litigations among different parties based on the claims and terms of settlement. Another factor because of which insurance is unattractive, the insurance company might have its own valuation methods and there may be substantial shortfall in the claim settlement. Insurance does not cover all kinds of risks like policy risks.

5.Insurance may not be a useful tool to cover the policy risk as it offers a limited protection. For example in 1998 U.S based MNC AES Corporation invested in Georgian electricity distribution company Telasi. As per the contract the MNC was allowed to pass on the escalated cost on the consumers and it was assured 20% return on investment. However, because of political situations they were not allowed to pass on the cost and the MNC had to bear the loss. There is no insurance cover for this kind of risks.

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