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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."

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.

CYRIL TUOHY is managing editor of Risk & Insurance®. He can be reached at ctuohy@lrp.com.

(Read Managing Editor Dan Reynolds' point argument, "Political Risk Must be Folded into ERM.")

December 17, 2012

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