RISKMANAGEMENT
change in character, and risk
managers shouldn’t think that
because one type of risk seems
to have faded, all political risk is
lessened. “In the 1970s, you had
a huge wave of expropriations.
In the 1980s, it was debt risks,”
he says. “In the 1990s, there
were a lot of big infrastructure
contract defaults and cancellations. In the last decade, it was
expropriations again.
“Now, in 2011, it looks like
political unrest may be the thing,
though it’s too early to say,”
Wilkin adds.
Companies with global investments, global markets or global
supply chains need to undertake
a process of identifying their political risks and deciding how to
mitigate them, Wilkin suggests,
using a five-step process.
1. Determining your exposure. This process, says Wilkin,
can range from the simple, as
in creating a listing of property
holdings, to complicated, such as
looking at supply chains, to very
complicated, such as considering reputational risk. “Look at
Google,” he says. “They’ll need
to examine what the impact on
their global operations will be of
the role played by their manager
in Egypt” in the popular uprising. “People Power and social
media add a whole new layer of
complexity to the political risk
equation,” Wilkin adds.
2. Quantifying the risks.
Companies need to estimate the
dollar value that a risk poses to
their operations before they can
decide how to mitigate the risk,
or, if they’re buying political coverage, how much to buy.
3. Mitigation. It’s very
hard to calculate any probabil-
ity of political risk, Wilkin and
other experts say, so companies
should focus instead on steps
to mitigate the risks. That could
mean deciding to develop a kind
of foreign policy for the compa-
ny, as many oil companies do. It
could involve restructuring or re-
locating operations. (In the ’90s,
Enron began putting its power
plants on barges, so that if a
country was experiencing politi-
cal problems, it could just tow its
property away.) Mitigation might
also mean diversifying suppliers
in the supply chain.
European and U.K. companies are more comfortable insuring
against political risk in Eastern Europe and Africa.
—AON’S SCHWARTZ
that protect against things like
expropriation or damage from
riots, terrorism or political violence. Companies should consult
a broker and a lawyer in this
process, because the terminology is important. For example, is
a unionization campaign a labor
problem, or was it politically
motivated?
5. Staying alert. Once a
company has decided what
kinds of mitigation measures to
take, it should continue to moni-
tor political risk. The degree
of risk, as well as the potential
damage to a company’s opera-
tions or bottom line, can change
dramatically, Wilkin says, and so
it’s important to keep reassess-
ing, and adjusting coverage and
mitigation measures. It’s also
crucial to be aware of how risks
against risk in Latin America,”
he says.
