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Geopolitical Risk Management in an Ever-Dynamic World


In recent times, the level of uncertainty and instability on the global stage is becoming alarming. This was the issue that prompted the panel discussion at the Chubb’s Multinational Risk Forum in March. Here, certain issues were discussed, including how organizations can recognize, ascertain as well as manage their exposure in the dynamic geopolitical risk spectrum.
 
The rate of terrorist attacks has increased significantly and the pattern of attack has become a lot less predictable. The rise of populism in the US and Europe and the near-collapse of the old order have resulted in serious geopolitical risks for businesses, investors and lenders.
 
The destruction of properties and tangible assets were the aim of terrorism in the past and they were more commonly carried out in unstable regions. However, the attacks on New York, London, Paris, Berlin, Manchester and Barcelona have opened our eyes to a different, broader and more dynamic form of terrorist attacks. With an increased scope of target, the concept of terrorism has diversified across multiple territories. The threats take different forms now, especially with the emergence of the lone-wolf pattern perpetrated by individuals, it has become even harder to police.
 
Business interruption
Examining this from a business standpoint, the major challenge will be to understand the implication of these incidents can affect revenue. Insurance against attacks and explosives might have been the focus of businesses in the past; however, interruption of business seems to be the biggest risk involved today. When normal operations have to be shut down and roads closed, the supply of products suffers greatly and thus, a focus on ‘non-damage business interruption’.
 
The recent form of threat geopolitically is something that insurance companies are moving fast to come up with plans to cover them because “business interruption risk” is now a thing and is currently being considered by businesses. There are several plans available now, trying to answer some of the questions, or provide cover for some of the recent dynamics in business threats. An example is “loss of attraction” which an extension to business interruption covering a policyholder against the losses that may occur as a result of the destruction of property close to theirs and this policy become applicable when the police or local authorities seal off access to that area.
 
Notwithstanding, so as not to lose sight of possible accumulation, risk and the need to understand and monitor this, insurers are treading cautiously. On the other hand, clients have to understand fully what the policy covers and improvements in wordings makes it clearer how the policy will respond to related events.
 
For instance, there is an optional protection offered by Chubb for political risk and terrorism to traditional property damage business interruption (PDBI) policies. Clients can have peace of mind as regards to claims because this policy covers a number of perils thus, reducing gaps in coverage.
 
The process of updating engineering propositions to carry to include a more robust review of terror and political violence risk is currently being done and with this, clients have the opportunity to actively manage risks in terms of assessing physical on site security as well as probable gaps in the policy protection. This way, assets of clients that may be within immediate vicinity that could attract possible attacks. This isn’t the market standard.
 
The risk landscape on the political front is equally unpredictable. People have different definitions for this however, unlike terrorism, this is the term used to describe potential losses that may arise from the actions of government. In other words, it may the risk of not paying an exporter, lender or investor. It could also be the inconvertibility of currency or freezing of assets.
 
The panel arrived at a conclusion that a wide spread uncertainty has been triggered by the rise of populism and this likely brings about protectionism as it has been hinted at in the United States. Also, there is a possibility of widespread political fallout in East Asia and immediately the scale of the power struggle between the US and China becomes evident, there could be some disturbing implications from a political standpoint.
 
Another probable issue that could come up as a result of populism is just like the recent row between Turkey and the Netherlands. Turkey said it would react in the harshest possible way when 2 of its politicians were not granted access to the Netherlands. With circumstances like this, an innocent Dutch investor in Turkey could indirectly be made to pay for this and issues like this are only likely to become more probable. 
 
With so many challenges being highlighted, risk managers in attendance at the panel discussion agreed with analyses like this noting that the multifaceted nature of the political scenes makes it hard to predict and even manage it. They also acknowledged the fact that investors and stakeholders in different businesses have different ideas of what political risks are based on what they face.
 
Receptive to risk
The fast moving nature of political risks is something Chubb and other insurers are struggling with, so it is impossible to cover every political risk inquired about. In some cases, it may be as a result of late request; for instance, the sudden inquiries that came in from Russia after it intervened in Ukraine. It is noteworthy to state that multinational businesses, investors and lenders will always find a way of getting an insurance policy that can give them the cover they need if they can think ahead.