A Guide to Assessing Political Risk for Multinational Companies

When it comes to doing business internationally, political risk can be described as the entirety of conditions, decisions or events of governmental or political nature, which directly or indirectly prevents or interferes with foreign business transactions, causes change of contractual agreements, or even results in partial or whole expropriation.

Political Risk Insurance

Every year around the world, it’s estimated that individuals and organizations suffer more than 10,000 terrorist attacks, with nearly 75 percent of those resulting in at least one death, injury or kidnapping. To protect individuals and organizations abroad, Clements Worldwide offers Political Risk Insurance.

Pete James, Commercial Sales Executive for Clements Worldwide, notes that because of the volatile and relatively infrequent nature of political risks, reducing the risk is hard. Essentially it requires predicting a terrorist event or a strike or civil disturbance. 

Still, organizations can definitely mitigate risks. 

“One of the most common and most effective mitigating tools is training and educating staff members on how to respond if an event occurs to minimize losses or business disruption,” James says. “This also includes clear communication at the executive level of what to do in case of a political risk event.”

Other tools to minimize exposure is development of clear evacuation plans, use of technology such as geo-tracking to monitor employee whereabouts, and the development the clear standard operating procedures (SOPs) in case of an accident or emergency. 

“Risk managers should monitor risk maps, which will provide at a glance information on emerging threats in different countries that a risk manager can use to prepare for risks to employees and assets,” James says.

Risks that All Multinational Countries Need to be Aware of

Violence: One of the main political risks a company must be wary of is when it takes the form of violence against employees. For example, in several oil-rich regions in the world, political groups regularly launch attacks against companies doing business, ranging from kidnappings to rock throwing to death threats. Hiring security is always a prudent move on the part of these companies to limit the violence, but sometimes that’s not enough.

Economic Risk: While it may not seem to be a big deal, a government that decides to increase taxes on a product or industry on a what to outsiders may seem like a whim can cause major financial challenges for a company doing business in its country. Multinational companies should keep an eye on signs of an unstable economy, high inflation rates and any change in the political climate. 

Takeover Risk: This expropriation risk relates to losses caused by actions approved or taken by the host government in an arbitrary or even discriminatory way, which deprive a business of its control or even ownership of its investment. Despite the promise of elections and fair government in several parts of the world, not every country’s political leadership plays fair when they are on the losing side and the danger of a takeover or nationalization by a government is a serious political risk for businesses. This is especially true with non-democratically elected governments or areas going through an unstable political transition. A company can find its business snatched by those in charge.

Protest Risk: Political protests by local groups can represent political risk in a number of industries, causing disruption of services, fear of dealing with the company or problems getting workers and goods (via customs) in and out of a country. Protesters can get aggressive and can put workers in danger.

James recommends that companies look to insurance as a powerful way to mitigate political risk. Whilst at a macro level, political risk and catastrophes are very difficult to manage. At the company level, political risk can be defended against, especially in combination with other, more proactive political risk management strategies.

Many large companies utilize sophisticated systems to evaluate political risk in regions or hire a professional chief risk officer or director of government affairs whose sole responsibility is to stay on top of potential political risks. Careful assessment and analysis of situations is key to avoiding political risk.

Be sure to check out the PRS Group’s most recent Political Risk Index Table. The table provides the overall measure of risk for a given country, calculated by using all 17 risk components from the PRS Methodology including turmoil, financial transfer, direct investment, and export markets.  Also, you can review the Clements Country Risk Guides on up-to-date travel advisory notices for health, safety & security, and terrorism.  

Keeping your employees safe is our priority. Call us today at +1.202.872.0060 or 800.872.0067 or e-mail request@clements.com to discuss how we can tailor our policy to meet the size and scope of your organization. 

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