Aon Identifies Unconventional Threats to U.S. Corporate Balance Sheets

Aon Corporation released its “Report Card for the World,” identifying “unconventional threats” to the balance sheets of U.S. firms conducting business abroad. Aon Trade Credit, which annually maps business risks around the world, found several threats U.S. companies may be underestimating, including:

*Risks from war on the Korean Peninsula, a well-understood threat, but one which may cause greater-than-expected disruption due to South Korea’s status as a crucial supplier of high-tech components including computer memory chips
*Risks from hostilities between India and Pakistan – although India is a small market for U.S. companies, the country is becoming increasingly crucial as an “offshoring” center for back-office functions (e.g. call centers) of U.S. firms.

Bryan Squibb, managing director of Aon Trade Credit, said that such threats have gained importance following the Sarbanes-Oxley Act of 2003. “Sarbanes-Oxley has been called the most significant accounting legislation since the Securities Exchange Act of 1934,” said Squibb. “One implication of this new law is that companies are responsible for having processes in place to manage and disclose threats to their balance sheets.”

International political risk and trade credit exposures, Squibb noted, are one example of threats that are sometimes overlooked or assessed haphazardly. Such risks include war, civil war, terrorism, expropriation, inability to transfer currency across borders, and trade credit defaults by foreign or domestic customers. A 2001 study by Aon Trade Credit discovered that, in the Fortune 1000, only about 26 percent of companies had in place systematic and consistent methodologies to assess political risks.

“Although risks such as war and economic crisis are outside the scope of normal business dealings,” said Squibb, “companies have a responsibility to understand these risks, and the risk management community is constantly developing new ways to deal with them.”

Aon Corporation also announced the availability of “Offshoring Protection Insurance,” which for the first time enables companies that engage in overseas business process outsourcing (BPO) to transfer risks from political developments.

The coverage pays unanticipated extra expenses in the event that an “offshored” operation is disrupted due to war, embargo, government intervention, or terrorism, among other political events.