January 28, 2015
3 Strategies to Manage Geopolitical Risk
by Evan Freely
Risks are increasing in likelihood and severity, and the trend is expected to continue, so companies need to start preparing now.
Geopolitical risks are high on the agenda for multinational business, both in terms of likelihood and severity. And that’s expected to continue over the next decade, according to the recent World Economic Forum Global Risks 2015 report.
The four most likely geopolitical risks, according to the report, are:
- Interstate conflict, such as Russia’s annexation of Crimea.
- Failure of national governance.
- Weapons of mass destruction.
- State collapse or crisis.
What should you do if your company does business in less stable parts of the world? Put simply, be prepared for everything.
That may sound trite, but risk professionals are charged with protecting company assets, investments and people around the world from all possible threats – including political risk, which can often emerge in countries that were previously seen as relatively risk-free.
Here are three strategies to help manage geopolitical risk in 2015 and beyond.
- Take a multi-country approach
As Marsh’s recent Political Risk Map 2015 report shows, political hot spots exist in every corner of the world, driven by a variety of underlying political, economic and societal factors. Instead of purchasing single-country insurance policies, consider multi-country credit and political risk programs, which can often bring more favorable terms and conditions. Multi-country policies can offer blanket regional or global coverage for a variety of risks, including political violence, currency inconvertibility, expropriation, non-payment and contract frustration.
- Protect your balance sheet, not just physical assets
Credit or non-payment risk closely follows political risk. In Global Risks 2015, the risk of state collapse or crisis ranked fourth in terms of likelihood. When a government collapses or descends into crisis, it often loses its ability to honor financial obligations. This can quickly spread to the private sector, creating a chain reaction of default. If you are a supplier or lender to buyers based in less stable markets, consider purchasing structured credit insurance.
- Build resiliency plans before trouble begins
As we saw in Sydney and Paris, terrorist or politically motivated attacks can happen without warning. So it’s important to engage in effective crisis management and resiliency planning ahead of a potential event. Identify essential functions and assess the potential impact of a crisis on your customers, employees and other stakeholders. Developing and testing crisis plans that ensure effective communication with employees can better protect them during an emergency.