International and local companies assume a variety of forms of risk with every sale, lease, purchase, loan, or investment they make. These risks are not simply commercial, financial, or political in nature, but include a plethora of other inherent risks that encompass the technical, environmental, developmental, and socio-cultural realms. Transaction risk, by contrast, is the country, sovereign, political, economic, financial, technical, environmental, developmental, and socio-cultural risk that an organization assumes in every international action it engages in.
A sound transaction risk management process will include certain basic elements that result in the creation of an environment conducive to effectively managing risk. Global best practices dictate that a number of actions should be taken to create a transaction risk management program. Among them:
- The transaction risk management function should be centralized.
- Transaction risk guidelines should be established and widely disseminated.
- Country/sector limits should be established.
- A system to better delineate the severity of perceived risks should be established.
- Quarterly transaction risk reporting should be implemented.
- A company should make maximal use of internal information capabilities while incorporating a wide array of external information sources into analyses.
Other means of managing transaction risks, especially in cross border transactions include the purchase of Deal enabling risk transfer insurance such as Representations and Warranty Insurance which protects the insured for financial losses in the event of unknown breaches of a seller’s representations and warranties made in connection with a transaction. Deal participants may also purchase Tax Indemnity Insurance which protects the insured against known contingent tax exposures resulting from the tax treatment of a past transaction, investment or other legitimate business activity and Contingent Liability Insurance which protects the insured against known exposures that may arise after the close of a transaction, such as successor liability, open-ended indemnities and/or potential litigation.
This coverage enables parties to efficiently transfer transaction risk, increase deal value and maximize returns. Deal participants’ appreciation and understanding of the risk transfer elements provided by these products, as well as their ability to use this coverage strategically to facilitate the negotiation and execution of transactions, is largely responsible for driving the growth in demand for transaction risk coverage.
Milton & Cross Commercial Solicitors provides individual and corporate clients involved in International transactions with transaction advisory and risk management services geared towards unlocking maximal value from business transactions. We may be contacted directly on +2348036258312 or by email at miltoncrosslexng@gmail.com.