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Political Risk Index: Spring/Summer 2023

Analysing patterns in the world’s most vulnerable countries

By Sam Wilkin | July 11, 2023

In this edition of the Political Risk Index we turn our attention to inflation and the cost of living crisis that has afflicted countries around the world.
Credit and Political Risk
Climate Risk and Resilience|Geopolitical Risk|Economic Challenges

High inflation has not only economic costs but social and political costs as well. Our latest Political Risk Index finds that rising energy prices, and heavier reliance on collective bargaining arrangements, is associated with greater intensity of protest. This finding explains why countries in Europe have experienced some of the most extensive cost-of-living protests of 2022 and 2023, and may continue to do so while inflation remains high.

Since the founding of this Index, one constant has been a focus on political risk in the emerging world. That assumption of the past three decades is now being called into question, as trends such as polarization and rising unrest manifest in rich countries as well.

This new trend poses particular challenges for the insurance industry, because these rich countries, where threats from civil disorder are growing, are of course also home to the world’s greatest concentrations of insured exposure.

Risk transfer in an inflationary environment

Corporations are, of course, also severely impacted by inflation. Given increased costs (salary inflation, energy, insurance etc) no organisation can afford to transfer every risk, in every country, so where do they start?

Any organisation faces a constant battle between risk and reward, between protecting shareholder interests and maximising shareholder returns. Add in a global element to the mix, such as operational facilities overseas or international supply chains, and you increase the stakes considerably. As such companies need to able to foresee the emerging risks and plan for how they will manage them should they become reality.

The first step for any organisation is to map the full range of potential risks they face, and this is no easy task given the broad spectrum of risks affecting business operations. Often seeking internal stakeholder agreement to undertake the mapping process is the hardest part of a risk management exercise but undeniably worthwhile to put organisations on the front foot and keep them informed.

Having established the playing field, decisions need to be made on risk priorities. What risks could the business comfortably take and what risks would a company not want to take? From the latter list, which risks are the higher priority risks in the eyes of the business and its many stakeholders? These risks are the ones a company may look to dispose of.

Political Risk insurance is a discretionary cover. The challenge with most discretionary covers is that most companies only think of mitigation when it is too late. By the time a company decides to buy insurance, the insurers (who have their own shareholders to consider) have either increased the price of cover or have stopped writing cover all together.

Let’s consider Political Risk insurance in the context of the Russia and Ukraine conflict. Cover was widely available in late 2021 but when the armed phase of the conflict started in February 2022 the availability of insurance cover dried up. That is not to say that if a company had bought cover, it would fall away (political risk policies are non-cancellable by the insurers for this very reason) but insurers were no longer interested in taking on additional risk in these territories.

Increased geopolitical tension has highlighted two independent trends. The first is that companies are more aware of geopolitical risk than ever before and are approaching the Insurance market for cover; the second is that insurers (who independently monitor geopolitical risks) are increasing rates or reducing cover on countries deemed most at risk.

So, which countries should be a risk management focus?

More than a decade ago, we launched the Political Risk Index to track political risk levels in major emerging markets. We use a ’risk temperature’ system to simplify the information and to highlight where countries were, relative to each other.

If a client had operations or interests in ‘red countries’ they have historically conducted a discovery exercise, understanding what insurance options are available, and at what price. However, recent events have demonstrated that amber can quickly turn to red so, to keep on the front foot, amber-rated countries also need to be considered as do the countries that are trending upwards.

In our latest index the amber countries (based on politically motivated protests alone), are Angola, Argentina, Azerbaijan, Brazil, Cambodia, Cameroon, Colombia, Egypt, Ethiopia, Guyana, India, Indonesia, Iran, Iraq, Cote d’Ivoire, Jordan, Kazakhstan, Kenya, Laos, Mali, Mexico, Morocco, Mozambique, Nigeria, Peru, Philippines, Saudi Arabia, Senegal, South Africa, Thailand, Uganda, Uzbekistan and South Africa.

The countries trending up are Argentina, Chad, Ecuador, Egypt, Guyana, Kenya and the Republic of Congo, Turkmenistan, Uganda and Uzbekistan.

If a company is exposed to red or amber countries, or they are exposed to countries that are trending up, it would be a very worthwhile exercise to understand what financial losses could be sustained, and what may happen if further deterioration occurred; it would also be time well spent to explore what the cost of mitigation could be.

Today’s amber risks could easily become tomorrow’s red risks so like the old advertising campaigns said, ‘buy now to avoid disappointment’.

Thank you for taking the time to read this Political Risk Index, we hope that you find it both interesting and valuable.

Access the Political Risk Index: Spring/ Summer 2023


Director of Political Risk Analytics, Financial Solutions
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Head of Financial Solutions for Australia and New Zealand
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