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Risk in Context

North Korean Missile Threat Raises Political Risk Levels

Posted by Julian Macey-Dare July 28, 2017

On July 4, reports emerged that North Korea had tested its first intercontinental ballistic missile, which it claims has the potential to reach neighboring countries, and possibly even the US.

Growing geopolitical tensions between North Korea and other countries in the region, such as South Korea and Japan, as well as with the US, have been simmering for some time. But now these tensions have been taken to the next level.

If the situation escalates, it could significantly raise political risks in those countries immediately threatened by North Korea’s nuclear development. Beyond increased tensions between countries, there is the potential for a heightened risk of conflict between regions. For example, US officials would consider using military force.

You should therefore keep a close eye on developments and consider how various scenarios might impact your organization’s regional and global interests and operations.

Markets React to Growing Threat Levels

The news of the missile launch had an immediate effect on markets in the region, with an initial hit to stocks in Japan and South Korea. While this appears to have been an initial knee-jerk reaction, investors are likely to remain cautious and trade credit risk may increase as a result.

What to Consider in Your Risk Management Plans

Given the current threat levels and recent impact on markets, the following strategies can help you prepare for any increase in political risk:

  • Manage your credit risks: Any escalating tensions are likely to have an impact on regional and global markets. Take the opportunity now — before a crisis develops — to assess your potential credit risks in the countries affected by these events.
  • Beware of possible supply chain disruptions: The complexities of supply chains means a disruption in one country can have a severe knock-on effect across your entire network. If you have operations or suppliers in any of the countries experiencing heightened tensions, you should review your contingency plans.
  • Have crisis plans in place: As tensions could escalate to political unrest or military conflict, you should have practiced response plans at the ready, understand how to avoid resulting business interruption, and be sure to prioritize employee safety.
  • Risk transfer: With political risk cover readily available, you could consider transferring your risk to the insurance market. Insurers continue to view political risk as an attractive line of business and are competing aggressively for business.

At the current time, the rising tensions between North Korea, its neighbors, and the US do not show signs of abating. We will be keeping a close eye on developments and issue further guidance as needed.

Julian Macey-Dare