Three Strategies to Better Manage Geopolitical Risk
Geopolitical risks are high on the agenda for multinational business, both in terms of likelihood and severity. And it’s expected to continue over the next decade, according to the recent World Economic Forum's "Global Risks 2015" report.
The four most likely geopolitical risks, according to the report, are:
- Interstate conflict, such as Russia’s annexation of Crimea.
- Failure of national governance.
- Weapons of mass destruction.
- State collapse or crisis.
But what should you do if your company does business or has operations in developing and/or less stable parts of the world? Put simply, be prepared for everything. That may sound trite, but risk professionals are charged with protecting company assets, investments, and people around the world from all possible threats — including political risk, which can often emerge in countries that were previously seen as relatively risk-free.
Here are three strategies to help manage geopolitical risk in 2015 and beyond:
- Take a multi-country approach. As Marsh’s recent Political Risk Map 2015 shows, political hotspots exist in every corner of the world, driven by a variety of underlying political, economic, and societal factors. Instead of purchasing single-country insurance policies, consider multi-country credit and political risk programs, which can often bring more favorable terms and conditions. Multi-country policies can offer blanket regional or global coverage for a variety of risks, including political violence, currency inconvertibility, expropriation, non-payment, and contract frustration.
- Protect your balance sheet, not just physical assets. Credit or non-payment risk closely follows political risk. In "Global Risks 2015," the risk of state collapse or crisis ranked fourth in terms of likelihood. When a government collapses or descends into crisis, it often loses its ability to honor financial obligations. This can quickly spread to the private sector, creating a chain reaction of default. If you are a supplier or lender to buyers based in less stable markets, consider purchasing structured credit insurance.
- Build resiliency plans before trouble begins. As we saw in Sydney and Paris, terrorist or politically motivated attacks can happen without warning. So it’s important to engage in effective crisis management and resiliency planning ahead of a potential event. Identify essential functions and assess the potential impact of a crisis on your customers, employees, and other stakeholders. Developing and testing crisis plans that ensure effective communication with employees can better protect them during an emergency.
For more information, read our Political Risk Map 2015.