News Risk Management26 Sep 2018

Geopolitical tensions create significant increase in political risk losses up from 2017-Willis Towers Watson

26 Sep 2018

Growing geopolitical concerns are causing a rise in political risk exposures, with over half (55%) of global organisations with revenues greater than $1bn experiencing at least one political risk loss over $100m in value, according to a survey from Willis Towers Watson and Oxford Analytica.

Their annual Political Risk Survey, which involved interviews with senior executives of 40 leading global firms across industry sectors, revealed that the political risk implications of emerging market economic crises are increasing, reflecting the market reaction to a flare up in emerging markets – most notably in places like Turkey and Argentina.

Other key survey findings:

  • The most frequently reported political risk related loss was exchange transfer which impacted nearly 60% of those experiencing losses, followed by political violence (48%) and import/export embargos (40%).
  • The key geopolitical threats were seen as US sanctions policy, emerging market crises, protectionism/trade wars, and populism and nationalism.
  • While Russia and Vietnam were most frequently cited as countries where losses occurred, losses were recognised throughout Europe, Latin America, APAC, Africa and the Middle East.
  • 60% reported 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.
  • More than 70% reported holding back from planned investment as a direct result of political risk concerns.
  • Larger companies were more likely to report using avoidance strategies – among companies with more than $1 billion in revenues, 82% stated that they had scaled back investments, and 86% had avoided future investments. Companies most frequently reported scaling back investments in Nigeria, Iran, Russia and Venezuela.

Mr Paul Davidson, chairman and chief executive officer, Willis Towers Watson Financial Solutions, said, “It is clear from our findings that political risk has increased significantly, now becoming a reoccurring and material cost of doing business. 

“If these levels remain elevated, companies will fall under increasing pressure from shareholders for greater levels of transparency around the losses actually incurred.  Companies will need the ability to monitor, quantify and manage these risks as well as develop strategies to mitigate them.”

Mr Simon Coote, deputy director, Oxford Analytica, said that companies  typically grew up managing cyclical economic risks, not political.

However, the recognition of rising losses due to political risk means that it can no longer be excluded from executive decision-making.

“To better mitigate political risk exposure, companies need to reframe how they operate. Taking steps to manage political risk must become a requirement of doing business, not simply regarded as an inevitable cost of operating in challenging environments,” he said.

The annual study comprised a formal survey of 40 leading companies, the majority of which were Forbes Global 500, backed by in-depth follow-up interviews with 10 of the participants. Willis Towers Watson and Oxford Analytica said the study should not be seen as representative of companies worldwide, but rather of a leading group of firms that both face significant political risk exposure and invest significantly in political risk management.

The firms represented a cross section of industries including food and beverages, oil and gas, mining, pharmaceuticals, real estate, automobiles, and utilities. The companies are mainly headquartered in North America, Europe and Japan and have extensive global operations, including in “risky” regions.

More on the report can be found here.

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