Analysis and Research

22nd October 2015

Diversification, risk assessment and risk mitigation are essential for businesses to proactively deal with the unpredictable impacts of geopolitical risks.

Geopolitical risks are particularly challenging for companies: they are hard to predict and their results can cascade into many other business risks. The interplay between economic and geopolitical challenges makes it even more difficult for businesses to manage their global value chain. These risks can have significant impact on businesses operating, selling or sourcing in the area.

What distinguishes geopolitical risks from other risk categories is their unpredictable duration. Wars may last a couple of years or drag on for decades. That makes business planning especially difficult amid conflict.

The strong inter-connectivity between geopolitical risk and other risks holds clear ramifications for business. These include price volatility for energy and other commodities; foreign-exchange volatility; supply-chain disruptions and the collapse of consumer demand for products and services. During a regional or national crisis, governments may struggle to maintain critical infrastructure and transportation nodes, or to contain a civil or labor disturbance. Governments may also try to increase revenues by raising taxes or confiscating assets under such politically charged circumstances.

Companies will feel the effects of geopolitical turmoil whether their activities in the area are manufacturing, selling or supplying, and all organizations must consider the risks posed to their people, plant, procurement and their profitability. Political and economic risks also affect which potential new markets companies choose to enter, where they choose to source suppliers, where they site new facilities or subsidiaries, or where they make acquisitions.

This is where Veritas Consulting comes into play. Our team of experts will be able to offer on-point and insightful analyses, taking into account correlative studies and perspective, only we can offer.

Risk mitigation follows from the risk assessment and should include contingency plans on multiple levels, from simple shifting to an alternative supplier to knowing how to evacuate personnel if necessary, to having adequate security. Too often, people seek solutions once the house is on fire!

Supply-chain risk assessment and insurance, coupled with business continuity planning, can help increase resilience if a supplier is shut down due to political events, if ports are closed, if local governments mishandle natural catastrophes. Kidnappings and ransoms can be insured, along with experts who can help in working to get your employee back. Cyber insurance is growing as cyber-criminal gangs operate with impunity from foreign countries.

While coverage for sudden currency devaluation doesn’t exist, devaluations are often followed by capital controls that prevent multinationals from repatriating profits—with insurance coverage available.

Many large corporations have captive insurance entities for self-insurance. Companies need to review the risks their captives cover, even when geopolitical strife seems far away. For example, risks surrounding property, equipment, worker safety and the supply chain may increase as a result of insufficient infrastructure, which in turn is a result of governments in crisis being unable to conduct proper maintenance or construction. Captives can be used as long-term vehicles to help insure emerging risks, with manuscript policies and customized programs for political exposures, supply chain, cyber or other risks. Captive usage can encourage discipline in the risk-management process, from gathering data and attempting to quantify exposures, to promoting risk engineering to improve preventative loss control. Another intrinsic benefit of captives is the possibility to work with partner companies to grow into risk assumption, stepped up over time in partnership. Captives can also encourage moving the risk agenda into catastrophe protection and a more global enterprise approach.

We exist to facilitate cross-border investments, so companies can make the investments they need to make while still being protected from many of the geopolitical risks they face.

Summary:

  • Geopolitically based risks have clear ramifications for business, and companies could benefit from better understanding these exposures to their business model.
  • Geopolitical risks can take many interconnected forms, from infrastructure and supply-chain disruptions to a lack of rule of law, to expropriation, to war.
  • Diversification, accurate risk assessment and risk mitigation are essential to proactively dealing with geopolitical and value-chain exposures in a holistic risk-management approach.
  • Neighboring countries can be affected by another nation’s risks.
  • Insurance coverage and analysis tools exist for many of the subsets of geopolitical risks, allowing international trade and investment to continue.