A session at the RIMS 2022 conference looked at how businesses and corporations can mitigate the risk posed by global political events.
The global stage has had its fair share of polarizing political events over the past decade, compounded by the weighted impact of the COVID-19 pandemic. The last two years in particular have made it clear how important it is to offer companies and organizations appropriate insurance cover for political risks.
If there is one lesson to be learned from these moments of political risk, it is that the landscape is constantly changing and major events can occur at any time. It is imperative for organizations to have adequate safeguards and mitigation plans in place so that a political event does not impact their operations.
A session at the 2022 RIMS conference, titled “Welcome to the Roaring 20s: Political Unrest in Changing Times,” discussed the impact of these global political events and how boards and C-suites can adequately prepare.
In particular, speakers Laura Burns, senior vice president of political risk and financial solutions at Willis Towers Watson, and Debbie Gramer, director of risk management at Arrow Electronics, Inc., discussed the recent bombshell moments in the global political arenas, why insurance coverage for political risk consists of valuable and 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 of which are still ongoing, such as the Russia-Ukraine conflict. Other events Burns addressed were the Hong Kong protests in 2019 and the military conflict in Myanmar in 2020, which she says “are not the usual suspects of unrest and violence.”
As there is no shortage of such cases, Burns then elaborated on the findings of a political risk survey conducted by Willis Towers Watson in collaboration with Oxford Analytica. The survey examined the various political risks that were causing losses for companies and organizations and which regions of the world were of most concern.
An intriguing result of the survey showed that the companies surveyed in late December 2021 showed major concerns in the Asia-Pacific region, particularly in the countries of China and Taiwan. Ironically, the regions with Russia and Ukraine did not have a worrying uptrend.
Looking at these regions around the world is important for US companies because they could hinder current or future business opportunities. Types of casualties suffered can result from political violence, forced abandonment in certain regions, and the arming of government sanctions.
So how may these recent events affect businesses? Burns said: “In terms of the financial impact of these losses, they are generally rare, but they can often be very serious.”
What is political risk insurance?
It is clear that there is an urgent need for companies to include political risk protection in their policies. In order for companies to feel confident about purchasing this insurance, they first need to know what it entails.
So what is political risk insurance?
According to Burns, political risk insurance is “a range of covers designed to support multinational companies investing abroad”.
This type of insurance essentially functions as property insurance, protecting business assets abroad.
A risk manager’s response
In order for risk managers to develop an appropriate political risk response and policy, they must first understand their global risks. Gramer, speaking from a risk management perspective, said it was a crucial first step.
These risks need to be looked at closely, with factors such as assets, payroll and deliveries clearly assessed. Gramer said the next step is to assess the operations of companies in each country they operate in and dive into scenarios should a political risk event occur.
Gramer gave this example: “Suppose a company has branches in Poland, and [it] suddenly has to draw a border around Poland and can no longer [access the country]. How will you [submit] Payroll? Where do your shipments go to and from Poland? What services can Human Resources offer employees?”
This type of in-depth analysis allows a company to create a risk portfolio that focuses not only on what types of politically-driven risks exist in each region, but also whether those regions are important to the business function.
Another important factor risk managers need to understand is that there is no standard insurance coverage for this type of risk. Gramer said, “This is not one size fits all. Originally I was thinking of buying a limit that covers hazards across the board [would suffice]but it is not a limit.”
To ensure the right policies are implemented for the right risks, Gramer says risk managers must ensure the data they use to make those decisions is competent and relevant to each region/country in which they operate are. &