A world on edge: Political risk in 2017

As the U.S. reconsiders its position in the world in terms of trade, immigration, strategic allies and other geopolitical points of view, we can expect other nations to reconsider their positions toward the U.S. And just as the change in administration at home has shaken up the status quo, elections or changes in strategic viewpoints across the world could do the same. This leaves us with many sources of potential political volatility. Here is a list of some political risk issues to keep an eye on in 2017 and where political risk coverage may or may not apply.

Changing relationships

An unavoidable concern for business leaders in today’s globalized economy — one where virtually every organization can trace some supply line or revenue stream overseas — is the mix of politics and economics. A turn away from globalization toward a more nationalist, protectionist approach could lead to disruptions of several kinds. One of the most obvious is a trade war. Tariffs could go up and the value of imports and exports — and the business relationships that depend on them — could change overnight. While business losses the result when governments increase tariff rates do not usually fall under the protection of political risk coverage, some of the more aggressive actions that could follow in a confrontational atmosphere do fall under that protection.

Embargoes, sanctions, expulsions, expropriations, contract repudiations, export license cancellations, revocations of concession agreements, confiscations — these are moves governments may make as interests clash or domestic pressures mount. These moves may be made in direct retaliation for economic steps taken by individual countries. They may be in response to local reaction to these economic steps, and themselves may be more motivated by politics than economics. Regardless of the motive, if a government’s actions cause financial damages to corporations (such as loss of net investment at a subsidiary or costs from a frustrated contract due to one of the actions listed above), those damages can often be recovered under the terms of a political risk policy.

Not all political action is taken by governments, of course. Terrorists, opposition groups, and normal citizens gathered in the name of revolution, civil commotion, insurrection or civil war, may take action that is politically motivated. Businesses may be targeted directly, especially if they bear brands that symbolize a country with which conflict has arisen. When such actions affect your business – and the political nature of the action is clear, that also falls under the umbrella of political risk.

These risks are not new. What is new is a sense of rising potential for increased severity and frequency.

Surprises at the polls

Political risk policies can be designed to cover losses in places where business might take place but local politics may be too complicated to follow

Twice in the past year political establishments were surprised by the results of national votes. The U.S. election and the Brexit vote served as a reminder that the political weather is as unpredictable as the skies — more so, actually, given that storm modelling seems to get increasingly accurate, while election modelling based on polls does not.

Sharp turns in political temperature can come from anywhere. Recently the Philippines electorate brought about a sharp change in tone from Manila via the rhetoric of President Rodrigo Duterte. Elections are coming in South Africa and Kenya, with difficult to predict results. In Zimbabwe, the long-standing leader Robert Mugabe, at 93, recently announced he has no plans to retire, but a change in leadership is a not-too-distant eventuality. In Europe, the recent Dutch election did not produce a populist/nationalist victory, but French and German elections coming later in the year feature significant challenges from far right parties.

Regimes also change without the democratic process, as recent history tells us.

While careful political observers may be aware of the forces of change taking hold in localities across the world, few predicted events such as the Arab Spring, Russia’s annexation of Crimea and Turkey’s failed coup d’état. Furthermore, companies have neither the time nor resources to monitor every part of the world. Fortunately, political risk policies can be designed to cover losses in places where business might take place but local politics may be too complicated to follow.

Currency inconvertibility

Halting currency conversions through capital controls keeps cash from leaving the country

The most commonly considered political risks are the most dramatic: political violence, government seizure of assets. One of the perils that has garnered increased attention among political risk professionals lately, however, is of a more bureaucratic nature: currency inconvertibility.

Currency conversion is one of the invisible facts of international trade, and when it becomes visible that’s often bad news for businesses. Governments short on foreign currency reserves or in economic crisis, may put a halt to currency conversions through capital controls, which has the effect of keeping cash from leaving the country – even if the cash belongs to a foreign business. The petro-states such as Nigeria, Azerbaijan among others, that derive significant portions of their economy from the sale of oil, have seen foreign trade balances fall hard in the recent oil price decline. In these countries, and others where economic times are hard, currency inconvertibility losses have occurred and been covered.

Hot spots

The Middle East remains a hot spot, especially in places such as Syria, Libya, Yemen, Iraq and Afghanistan, where armed conflicts continue. While nearby in Jordan, Saudi Arabia and other Gulf states regimes are stable, it is easy to forget how quickly conflict can spread, and how the volatile social forces in that part of the world persist. While the hot-spot countries may not be in the insurable realm at this moment it may still be possible to get political risk coverage in other countries in the region that may experience spillovers — as long as the buyer has the foresight to pursue this protection.

Political risks at home

Political risk insurance has historically been intended to cover investment risks in emerging markets

The conversation about political risks looks mostly outside of the U.S. borders because political risk insurance has historically been intended to cover investment risks in emerging markets (with the exception of the domestic terrorism market).  But political risks as defined by insurance policies also exist at home. Governments set policy, pass laws and tweak tax codes in ways that can profoundly change the business landscape. These actions may mean large potential losses for a given company. As yet these are uninsurable risks, at least under the political risks heading. However, where U.S. government action involves the relationships between the U.S. and other countries cover can be found.  Revocation of a U.S. export license, government sanctions against a foreign country where you do business or sanctions that could cause you to lose significant business may, for example, be covered under a broadly written policy.

The political risk marketplace

Given the risks outlined above, you might wonder if political risk insurance still exists or if it’s affordable by anyone other than the largest corporations. In fact, the marketplace is large and growing. From a handful of markets in the 90s there are now more than 50. Rates are generally very competitive for most countries (other than those  in a state of conflict such as Syria) and, importantly, once rates are bound, they remain for the duration of the multi-year policy regardless of any deterioration in risk.

Not every risk is insurable — political risk experts will often cite the adage that you can’t buy fire insurance when your house is on fire. But those same experts will say — with perhaps a bit of incredulity — that some risks that would appear to be uninsurable will occasionally be transferable with the right market and the right buyer. As with any complex risk negotiation, relationships, history and presentation of the risk play a key role. And of course so does knowledge and awareness of the changing nature of the risks in an uncertain and disruptive world.

Categories: Global Risks, Political Risk, Reinsurance, Supply-Chain Risk, Terrorism | Tags: , , , , , ,

2 Responses to A world on edge: Political risk in 2017

  1. Bosco De silva says:

    Neat article…So well written… Cheers

  2. Steve Lowther says:

    great article, well put points and informative

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