How Can You Minimize Risk In A Highly Volatile World?

Is it possible to cut out risk when the world is undergoing such widespread disruption?


Today is one of the most uncertain and unstable times in living memory. From the Ukranian crisis to the Ebola outbreak, countries are becoming unstable and companies are needing to try and minimize the potential disruption to their performance.

One of the major issues at the moment is the potential for political instability within many countries that had previously been considered to be safe.

The Ukrainian issues for instance would have been difficult to predict, making planning for it even more difficult, especially the larger ramifications of the Russian sanctions that would have had a significant impact of business in the area. The rise of ISIS has also been a disruption that was unexpected, it created a situation that made supply chains in the local area and the availability of oil in the region harder to access. Both were difficult to predict and therefore the risk would have been low when business was originally placed there.

One of the main problems that companies have had is based on the relative stability that has existed for the pas decade. With the lack of conflict during he last decade in many of the countries that have now experienced these problems, many companies began work in these countries under the belief that historic tensions may have subsided. These problems, especially in Russia, where the number of foreign companies has been steadily increasing, have had a profound effect on companies like Mcdonalds, who have found that the Russian government has unofficially sanctioned them in response to the US and European business sanctions.

In response companies can purchase Political Risk Insurance (PRI) that protects them against losses incurred through political upheaval.

The basis of this generally tends to fall on contracts that may not be paid by governments or the loss of assets through expropriation. Nationalization occurred under Huge Chàvez in Venezuela where many of the foreign companies who had created infrastructure and manufacturing facilities had their assets expropriated by the government. Equally, expropriation coverage may include insurance against discriminatory actions targeted at foreign companies.

These are underwritten by some of the larger insurers as well as public entities too. The benefit of the public entities when underwriting (such as the US government or world bank) is that with these global bodies having an interest in a situation, that their weight will be behind any negotiations, rather than just the company itself.

We have seen that attempting to predict political unrest is difficult and so minimizing risk before these problems arise must be attempted regardless of how stable a country may seem at the start. This means thorough analysis of potential problems, existing friction and then simulating how to deal with these problems should they arise.

It will always be difficult to minimize risk when an entire political landscape can shift as quickly as we have seen recently. However, attempting to simulate how best a company can deal with issues is always going to be a priority whilst preparing with insurance will help to alleviate any issues that may arise. 

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