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How to handle growing threat of political risk


With the world moving from one crisis to the next, the Risk & Insurance Management Society Inc. says risk managers must be able to function in a potentially unstable business environment.

According to its report, “Decoding Political Risk Management,” RIMS gives political turmoil in Argentina and Brazil, the Brexit vote and continuing attacks by the Islamic State as examples of political risk.

“While the environment may be a bit risky and quite uncertain,” said Carol Fox, RIMS vice president of strategic initiatives, “the steps that professionals can take with their management and their security professionals can absolutely make a difference in how they approach these types of situations. “With globalization the world's become a lot smaller,” Ms. Fox said, “our supply chains, our value chains, our markets, are so interconnected that we can't take an isolationist's view and say 'it's not going to affect what we're trying to do.' ”

The report, released last week, defines political risk as that which stems primarily from the actions of governments, whether they are internationally recognized or not, and it can take the form of confiscation, expropriation and nationalization, license cancellation, embargo, war, civil war and terrorism.

Political risk has the potential to have a large impact on business, the report said, increasing its importance for senior leadership.

The study also notes that dividing the world into developed and developing countries is antiquated and can lead risk managers astray. Brazil, Russia, India and China were once considered good investment climates because of their economic potential, but the report notes these countries are now in significant political retrenchment.

“The West is now so concerned about Russian aggression that it has initiated severe sanctions, and bolstered its military presence in Eastern Europe while Brazil's political system and economy are under severe strain,” the report said.

The report said it is important for risk managers to get familiar with details of the country their company is considering entering or in which it's already doing business, starting with everyday factors such as the price of food.

Marc Siegel, international security expert and commissioner of the Global Standards Initiative at ASIS International, noted in the report that “people will tolerate a lot of abuse of their rights, but when the breadwinner can literally not bring home the bread, that's when revolutions start.”

A country's demographics also are important, said Mr. Siegel, pointing out that many unstable regions have large populations of younger people.

“And if those countries don't have well-functioning education systems that are competitive with Western countries', future prospects are limited,” he said, with political violence, radicalism and revolution common release valves.

Capacity in the political risk market has grown to $2 billion from about $700 million in 2009. The maximum coverage available with an individual underwriter is typically $150 million per project or risk.