By Arti Chopra ,
Managing Consultant - Strategic Risk Consulting, Asia
According to Marsh’s latest Political Risk Report, the political and economic environment will continue to remain fragile in 2023. Similarly, the latest Marsh-World Economic Forum's Global Risks Report indicated that we are currently living in a world of “compounding crises” that will continue to test the resilience of countries and businesses.
To thrive and stay profitable in the current risk landscape, it is imperative that organisations take the steps to enhance their resilience, by including crisis management planning as part of their geopolitical risk management strategies.
We are witnessing threats and incidents driven by political risk events, which in turn trigger crises across the world. Some prominent examples are supply chain disruption, food security crisis, involuntary migration due to armed conflict and other forms of political violence, both domestic and international. Amid this volatile backdrop, businesses are feeling the impact of changing economic policies with little or no control of the geopolitical climate.
Under these dynamic circumstances, the only way to thrive, is to prepare for disruption through fit-for-purpose crisis management practices deeply embedded within the organisation. Crisis management preparedness will help companies respond effectively, as opposed to reacting to emerging crises.
These are four steps organisations should take to effectively mitigate the impact of political risk events:
Political risks evolve, which means that they need to be constantly monitored and analysed. Depending on the nature and geography of business operations, being alert to changing political conditions and their potential impacts to the organisation should be a priority.
Examples of political risk indicators include, but are not confined to strikes, riots, civil commotion, terrorism, civil war, economic risk and other legal and regulatory risks. These risks also form part of Marsh Specialty’s World Risk Review, a proprietary country risk ratings platform which provides risk ratings across nine insurable perils for 197 countries.
Weighted Risk Scoring (illustrative)
As political risks affect multiple functions of a company and ultimately, the bottom line, the process of identifying and prioritising the risk indicators must include participation from critical functions such as, but not limited to, operations, risk management, legal, finance, corporate communications and external relations. Organisations that proactively anticipate these risks are forward-thinking and often navigate uncertainty with fewer surprises.
While it may not be feasible to plan for every political risk scenario, organisations can categorise these risks based on the likelihood and severity of impact. Scenario planning provides the opportunity to accurately assess the business impact of a political risk through chosen scenarios, which in turn facilitates more informed and improved decision-making.
Marsh conducted a comprehensive scenario planning exercise for a global financial institution with a presence in Asia, to determine the potential exposures to their operations across multiple countries due to the Russia-Ukraine conflict. This exercise provided the client with an analysis of the identified risk exposures, with short and long-term resilience actions.
In the process of scenario planning, factors such as the time span of disruption, external and internal forces, critical uncertainties, assumptions, and perspectives from stakeholders must be considered. Scenario planning should not be confused with business continuity: the former explores possible future events for organisations to make decisions today, whereas the latter helps identify remedial actions for business after a disruptive event has occurred.
Companies must invest in designing a bespoke crisis management framework that is tailored to the business and can be operationalised quickly during a crisis. An effective crisis management framework includes identified worst-case scenarios, action plans, stakeholder management strategies, as well as a competent crisis management team that comprises key representatives from across the business.
As business leaders are ultimately responsible for ensuring the success of a response, trained self-sufficient teams are a vital part of crisis management to ensure accountability, collaboration, and alignment with the organisation’s objectives.
Political risks need to be on the agenda of the organisation’s board and C-suite, as the impact of these risks span across the business. Senior leadership should incorporate political risk into enterprise-wide risk management and strategic planning. Proactive discussions and periodic exercising of possible crisis situations will help companies make dynamic, data-driven, and risk-informed decisions.
At the same time, crisis management exercises also provide organisations with the opportunity to validate their plans and arrangements against disruptive events arising from political risk threats.
You can improve your organisation’s preparation for political events through an all-inclusive crisis management plan encompassing proven and effective practices. Speak to us to validate your business resilience against crises resulting from political risks and the possible actions that can be taken to safeguard your operations.