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By GREGORY DL MORRIS, an independent business journalist with more than 20 years' experience covering finance, industry and commerce worldwide.

Widespread backlash against austerity measures in Europe have led to the ouster of the incumbent French president, Greece struggling to form a coalition government and panic that the Euro may not survive.

Despite the dire headlines, brokers believe that the geopolitical risks of doing business worldwide are still manageable.

"Risks continue to grow for companies operating internationally and can provide many complex challenges for global business," said Jessi Harbron, associate broker with Aon Risk Solutions' Crisis Management Practice. "Insurers will continue to be cautious when underwriting risks in perceived high and severe risk areas and risks perceived to be a target."

Harbron notes that the Arab Spring highlighted the importance of considering broader political violence coverage as opposed to solely purchasing terrorism coverage.

"Capacity is more restricted for some of the broader political violence perils," she said, "specifically, insurrection, revolution and rebellion, mutiny, coup d'état, war and/or civil war. This is a result of increased client demand and tighter accumulation controls. Most of the terrorism Lloyd's syndicates offer war capacity, but capacity is reduced on country war aggregates."

The increased political risks were highlighted in Aon's 2012 Terrorism & Political Violence Map, which downgraded 37 countries due to civil unrest.

David Claridge, chief information officer of Risk Advisory, notes that "the ramifications of Arab Spring continue to be felt, and do not neatly fit into our annual snapshot. We anticipate instability in the Arab world in the coming months and years as a result."

He adds that "there are quite a number of countries where we mark terrorism as being a significant threat, but of course the level of threat to foreign investors is variable. For example, the Maoist CPI-M in India are responsible for a large number of attacks, but these rarely impact upon Western business, although that in part is due to a paucity of potential targets in the northeast of the country where the group is predominantly active. Insurgencies and terrorist campaigns of this sort tend to last for many years."

Claridge urges that "global risk managers need to think with greater granularity about the spectrum of political violence risks their organizations are likely to encounter. The current trend for downgrades coincides with businesses seeking overseas markets or manufacturing bases as havens from stagnating economies and increasing tax burdens at home. This drives their exposures to political violence and terrorism upwards, and potentially positions them as actors in existing localised conflicts as well as unwitting victims of global and regional violent groups."

Rage Against Austerity

In the Aon study, austerity measures were the reason that 43 percent of the countries were downgraded by the organization. But Evan Freely, global leader for political risk and trade credit at Marsh in New York said that some global risks that are getting a lot of attention may be overhyped, while others are flying under the radar. For example, "the fear that the Euro Zone is going to fall apart are overblown," he said. "There is no doubt that there are some structural and economic changes that need to be made, but the political will to sustain the euro is very strong."

Freely's reassurances come as a welcome tonic to risk managers and companies with interests on the continent as the headlines seem to get more and more grim. Recent developments have been taken as a repudiation of the austerity measures proscribed by the European Central Bank and supported by German Chancellor Angela Merkel.

In particular, the Greek elections of May 6 failed to return a majority, and the parties have been unable to form a coalition because the strong showing of far-left and far-right interests have both vowed to annul bail-out agreements. Financial authorities within Greece and in the rest of Europe are said to be preparing for Athens to default and leave the Euro.

Less dramatically but just as telling, the election of socialist Francois Hollande as President of France brings a powerful anti-austerity voice to the center of European governance. In one of his first statements after the election, Holland advocated raising the top marginal income-tax rate to 75 percent on those making more than 1 million euros per year.

Another source of concern that may be causing too much anxiety is the possible impact on global trade of a "hard landing" for the Chinese economy. Freely explains that hard and soft landings are terms more appropriate for free-market economies. "The Chinese have a centrally planned economy," he stressed. "They simply won't allow what we would recognize as a hard landing. They have the resources and the authority to do that."

In contrast, Freely looks closer to home at some risks that may not be obvious. "It used to be that global businesses expected political risk to affect economics in Latin America or Eastern Europe. But look at what is happening in the U.S. and Western Europe. We once thought of sovereign default risk in underdeveloped nations. Now it is a serious threat in Greece."

Freely noted that in addressing geopolitical exposures, owners have come full circle in buying coverage. "In the late 1980's and early 90's people would buy a global program to protect themselves from everything, including expropriation. Through the 90's those risks receded, and insureds moved more toward insuring single risks. Now they are going back to global polices."

At present, he adds, there is sufficient capacity for those broader coverages, even in the strictly private or commercial markets which can handle up to $1 billion for a single project. Beyond those there are multilateral programs through governments and non-governmental organizations.

May 15, 2012

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