Newsletter Sign-up

To not do so is a dereliction of duty on the part of a business leader.
By DAN REYNOLDS, managing editor of Risk & Insurance®


Political risk must be analyzed and addressed as part of an enterprise risk management program because to not do so is a dereliction of duty.

Yes, political dangers are complex and evolving as fast as computer network dangers are. But we cannot just throw up our hands at the dangers of political risk just because they are complex, fast moving and difficult to analyze.

An analysis of risk and reward must accompany any business decision. Seasoned leaders know that they are sometimes going to fail in that analysis, and nowhere is that reality more true than in the area of political risk.

Global supply chains can be picked up and tossed like a cotton rug by work stoppages in Taipei or Mumbai.
The crucial drive for raw materials is intertwined with political will.

Look at how failure to extend alternate energy tax credits by the U.S. Congress has dampened the prospects of wind and solar.

Look at how some measure of malleability by nations with connections to the Arctic has led the likes of Royal Dutch Shell to place a major wager on arctic drilling.

The speed at which political upheaval is being driven by social media has toppled governments friendly to the United States and its businesses in a matter of weeks. But the speed and complexity of this reality calls for more risk management engagement, not less.

And there is opportunity in all this creative destruction.

A cogent analysis of political risk, whether it be forecasting the recent failure of the EADS and BAE merger, or gauging the political will in Germany for bailing out debtor nations could create windfalls for companies that place their bets on the right squares on the roulette table.

And let's not make the mistake of viewing the framework of viewing political risk as something that solely involves foreign affairs.

The painful combined ratios that we find in workers' compensation are something very much influenced by the degree to which state governments regulate components -- prescription drugs and the tort environment -- of the line.

It breaks down even further than that. In Pennsylvania, the rights of property owners versus those of gas drillers in the drive to extract Marcellus Shale gas are being regulated now on a township by township basis, regardless of whatever way the governor sees things.
Political risk may be the toughest nut of all to crack: So have at it with gusto.

By CYRIL TUOHY, managing editor of Risk & Insurance®.


The speed of political developments in recent years ensures that political risk forecasting will forever remain an art, not a science.

If you've ever taken a serious political science class, you'd be excused if you sometimes felt you were taking Calculus II. Real political science uses formulas and matrices. It's an attempt to pin down politics as a science. That's why courses on politics are often referred to as "political science."

But it's not a "hard science," in the same way that we refer to biology, chemistry and physics.

No matter how much of a scientific veneer the discipline likes to cloak itself in, politics remain filled with the contradictory, the irrational and the downright absurd.
If economics is a dismal science, then political science is abysmal.

Lately, political events have been unfolding so quickly that even the best models have come up short -- again. From the debt crisis in Europe and the abrupt changes of Middle Eastern regimes to peace negotiations with South American anti-government rebels, some of whom have been at war with national governments for 50 years, the political landscape doesn't lack for surprises.

This makes political risk hard to insure. Where do underwriters turn to mine the data that will reveal patterns to predict political behavior? Color-coded political risk maps help, but you wouldn't pay tens of thousands of premium dollars for coverage based on maps.

It's difficult to use political risk analysis to identify the consequences of risk in such a topsy-turvy world, and to devise a mitigation strategy. There are just too many unknowns.

We often comes up short in analyzing political risk or offering risk mitigation strategies. The laws of unintended consequences usually result in the biggest risk coming to pass.

It's one thing to plan for a hurricane but quite another to respond to the kind of cascading events that we've seen in the last decade -- a terrorist attack followed by a retaliatory strikes, followed by war and then regime change.

The private market has developed new forms of political risk coverage, from the evacuation and repatriation of workers and managers, to medevac coverage in case of injuries inflicted in the course of revolution, and these coverages are often bolted onto other larger policies ... which goes to show the limits to which the industry can insure against political risk.

Political Risk Can Be the Catalyst for a Strategic Risk Initiative

By FRANCIS BOUCHARD, head of government and industry affairs at Zurich Insurance Group.


In a globally intertwined economy, geopolitics and political risk are increasingly seen as key elements of strategic risk. In fact, the corporate C-suite and boardroom now understand that the core drivers of risk are often impacted -- if not driven -- by global, political and economic developments.

As a result, over the last decade, corporate leadership has developed a much deeper understanding of risk management and the role of politics and economics. Today, global political risks are rarely absent from any major external challenge: be it the catastrophic consequences of Hurricane Sandy in the Northeast; or the coming fiscal cliff debate that threatens to bring on a U.S. recession; or the changing political landscape of China. And while political risk analysis remains increasingly complex, good fact-based analysis can help assess the direction of global change and how these external risks turn into internal risks.

A focus by risk management on global economic and political risk can serve as an organizational catalyst that can help its leadership formulate strategic risk questions that address these complexities, and opportunities, inherent in the current environment.

Organizations today may understand, at a fundamental level, how these complexities affect their businesses. And that, in turn, can reposition risk management into a more strategic function with the organization.

It can be a challenge to break out of the more traditional role of risk management, which has historically focused on risk mitigation rather than strategic risk analytics. We are engaged in conversations with customers, brokers and other stakeholders that encourage a better appreciation of the role of risk management in economic, political and strategic risk issues. But it is also an opportunity for risk management to help organizations prepare for the risks and the opportunities that will accompany the changing global economic and political landscape.