Growing geopolitical concerns and the resulting rise in political risk exposures are causing substantial losses for companies. For risk managers, ensuring that your board is on side in tackling the exposures is key – but could be something of an uphill battle.
In its 2018 political risk report, Willis Towers Watson found that 55% of global organizations with revenues greater than $1 billion experienced at least one political risk loss exceeding $100 million in value.
With political risk on the rise, it is fast becoming a “reoccurring and material cost of doing business,” Willis warned as it released the findings of the report this week, which it compiled by surveying senior executives from 40 major global firms across industry sectors.
The risks are also having a tangible impact on corporate decision-making: Almost two-thirds of executives said that political risk levels had increased since last year, and nearly 70% stated that they had scaled back operations in a country as a result of political risk concerns or losses. The same percentage of executives also said they had held back from planned investment as a result of political risk concerns.
The key geopolitical threats were seen as US sanctions policy, emerging market crises, protectionism and trade wars, and populism and nationalism.
“I can’t recall a global landscape as challenging as this one,” Paul Davidson, chairman and chief executive officer of Willis Towers Watson Financial Solutions, told Corporate Risk and Insurance.
While most of the geopolitical risks that we are witnessing today are not new, a maelstrom of global dynamics is creating an unparalleled landscape, he went on to say.
“It is simply a reflection of the fact that so many things are going on simultaneously, which creates a level of complexity that is perhaps different and consequently more challenging than we have witnessed in the past,” Davidson said. “Do I have any confidence that these risk levels are going to diminish anytime soon? The answer is no.”
For risk managers, understanding the exposures and putting risk mitigation strategies in place is key. But Willis’s findings suggest that at the C-suite level, more work needs to be done in terms of raising awareness and responding appropriately.
Quite a few respondents expressed dissatisfaction with their company’s decision-making on geopolitical risk, the report said.
“ERM [enterprise risk management] is not well-tailored to address complex geopolitical and social issues,” one respondent from the mining sector said in the survey, adding that at many companies, risk is an “afterthought,” and securing optimal outcomes is “impossible if you’re at the end of the decision-making process.”
“It would suggest that it’s not necessarily consistent within the board decision-making process, that the issue has the visibility that it would be desirable to have,” Davidson commented.
The starting point for risk managers should be building knowledge on the risks, according to the CEO.
“It’s about being properly provided for in terms of analysis of the risks that one is confronting, developing a set of strategies around that, and then considering what opportunities there are,” he said.
Of course, for some that will come in the form of insurance.
“It’s a proactive consideration of, what mitigation strategies can I undertake? One of which, I of course would say, ought to be to at least to consider whether there is an opportunity to insure some of that exposure – in the same way that you would insure your property, liability or any other risk,” Davidson said.
“Ultimately, it’s about trying to make the best-informed judgement that you can,” he added.