Welcome to the Roaring 20s: Managing Political Risk in Changing Times
The global stage has had its fair share of polarizing political events within the last decade, emphasized by the weighted effects of the COVID-19 pandemic. The past two years especially have emphasized the need for adequate political risk insurance coverage to be administered to businesses and organizations.
If there’s one takeaway from these political risk moments, it’s that the landscape is ever-changing, and big events can occur at any given moment. For organizations, it’s imperative to have proper coverages and mitigation plans in place so that a political event does not deter their operations.
A session at the 2022 RIMS conference titled, “Welcome to the Roaring 20s: Political Unrest in Changing Times,” discussed the impacts of these global political events and how boards and C-suites can properly prepare.
Specifically, speakers Laura Burns, senior vice president of political risk and financial solutions at Willis Towers Watson, and Debbie Gramer, director of risk management for Arrow Electronics, Inc., discussed recent bombshell moments across global political arenas, why political risk insurance coverage is valuable, and the best practices for risk managers when responding to political risk.
A Look at Recent Events
The session began with Burns reviewing recent political risk catastrophes, some even ongoing, like the Russia-Ukraine conflict. Other events Burns touched on were Hong Kong protests in 2019 and military conflict in Myanmar in 2020, which she said, “are not the usual suspects of unrest and violence.”
As there is no shortage to these types of instances, Burns then went on to discuss the findings of a political risk survey produced by Willis Towers Watson in conjunction with Oxford Analytica. The survey looked at the several political risks, which ones incurred losses for companies and organizations, and which regions of the globe were of most concern.
A fascinating find from the survey showed that company respondents, surveyed in late December 2021, displayed major concern in the Asia Pacific region, especially in the countries of China and Taiwan. Ironically enough, the regions containing Russia and Ukraine did not have an uptick in concern.
Looking at these regions across the world is important for U.S.-based companies to review, because they could hinder present or future business opportunities. Types of incurred losses can stem from political violence, forced abandonment in particular regions and weaponization of government sanctions.
So, how can these recent events impact businesses? Burns said, “In terms of the financial impact of these losses, they tend to be generally low frequency, but they often can be high severity.”
What Is Political Risk Insurance?
It’s clear that there’s an urgent need for businesses to have political risk coverage woven into their policies. For businesses to feel confident in securing this insurance, they first must know what it entails.
So, what is political risk insurance?
According to Burns, political risk insurance “is a suite of coverages that are intended to respond and support multinational corporations investing abroad.”
This type of insurance essentially works as a property insurance that protects business assets that may abroad.
A Risk Manager’s Response
For risk managers to craft a proper response and policy for political risks, they first must understand their exposures globally. Gramer, speaking as the risk management perspective, said this is a critical initial step.
These exposures need to be looked at with a fine-tooth comb, with factors like assets, payrolls and shipments being clearly assessed. Gramer said the next step is to evaluate company operations in each country they’re in, and dive into scenarios should a political risk event take place.
Gramer gave this example: “Say a company has operations in Poland, and [it] has to suddenly put a border around Poland and can no longer [access the country]. How are they going to [submit] payroll? Where are their shipments going to and from Poland? What services can HR provide to employees?”
This type of deep analysis allows a company to create a risk portfolio that specifically focuses on not only which types of politically motivated risk resides in each region, but if these regions pose concern to business function.
Another important factor for risk managers to understand is that there is no standard policy coverage for this type of exposure. Gramer said, “This is not one size fits all. Originally, I thought buying a limit that covered perils across the board [would suffice], but it’s not one limit.”
To ensure that the right policies are being implemented for the right risks, Gramer said that risk managers must ensure that the data they are using to make these decisions are competent and respective to each region/country they are operating within. &