Corporates are being warned to expect an increase in conflicts, civil unrest and trade disputes in coming years, as political risk continues to intensify and spread around the world.
“Political risks are inherently difficult to predict, but unquestionably the world is becoming a more volatile place,” Andrew van den Born, managing director of financial solutions at Willis Towers Watson (WTW), told Commercial Risk Europe.
“Arguably, we are witnessing a paradigm shift. In the past, we may have typically witnessed isolated events – for example, a debt crisis in Latin America, the Arab Spring or conflict between Ukraine and Russia. However, now there is political upheaval all over the world with events occurring simultaneously, resulting in contagion across the global economy,” said Mr Van den Born.
There are a number of drivers behind the increase in political risk, including the impact of technology and social media, shifting economic and political power from west to east, and the ongoing fallout from the 2008 financial crisis, explained Mr Van den Born.
“Populism is not about to go away and protectionist policies no doubt will continue to impact global trade. Income disparities continue to widen and people feel increasingly disenfranchised and dislocated from the political process – a situation that is arguably fuelled by the role of social media and technology. As a result, civil unrest has increased and the age-old perception of political risk as purely an emerging market phenomenon could change,” he said.
One of the most notable consequences of rising political risk has been a growing threat from conflict and civil unrest. With rising tensions in the Middle East, the threat of war has increased in recent years. Interstate conflict is the second biggest risk globally in terms of impact on GDP, according to the Cambridge Centre for Risk Studies’ Global Risk Index 2019.
Protests, strikes and riots were on the rise in 2019, with notable violent outbreaks in Hong Kong, Lebanon and Chile, as well as France. According to political risk analysts Verisk Maplecroft, a quarter of all the world’s countries saw significant increases in civil unrest during 2019. Heightened civil unrest is likely to become the “new normal” as its underlying causes – such as inequality and rising inflation – will take many years to resolve, it warned.
“We have seen a huge increase in the last few years in terms of riots and anti-government protests against governments all over world,” noted Roddy Barnett, political risk underwriter at specialist insurer Beazley.
“Primary examples would be those affecting Chile and its capital Santiago, but Latin America more broadly has been quite volatile, particularly Bolivia and Ecuador. Hong Kong has also seen extended periods of civil unrest and of course there is some concern over Taiwan following the recent election result. Countries closer to home have not escaped unscathed either – in France, strikes in Paris and other centres over proposed pension reform and other government policy changes are a notable example of ongoing civil disturbance,” he added.
This year will not offer companies much relief from political and geopolitical risk compared to 2019, according to Charles Hecker, partner at specialist global risk consultancy Control Risks.
“We are now seeing heightened tensions between the US and Iran. But even before the recent escalation between those two countries, 2020 promised to be a volatile year. This is in part because of the US presidential election campaign. The very presence of the campaign, even without knowing the winner, will be a destabilising factor in geopolitics,” he said.
According to Mr Hecker, President Donald Trump will likely seek to resolve critical domestic and international challenges, including the US-China trade conflict, Iran and North Korea. Some US adver-saries may test his patience during the election campaign, he said.
Mr Hecker does not believe that the US and China will resolve their trade dispute in any meaningful way this year, despite agreeing a ‘phase one’ trade deal in January. Quite the contrary, he believes tariffs and sanctions will be a feature for the foreseeable future, and not just between those two superpowers.
“Threats to spark a trade conflict remain between the US and the EU, and a trade dispute continues between Japan and South Korea, despite diplomatic efforts to ameliorate that standoff. The US continues to use tariffs and sanctions globally as threats and tools of foreign policy. In fact, tariffs and sanctions are becoming policy themselves, rather than instruments to influence behaviour,” he added.
The US-China trade conflict has implications for already fragile global supply chains, according to Mr Hecker. “Any escalation will force further changes to how companies source raw materials and deliver finished products. We believe the US-China trade dispute will be particularly relevant in high-tech sectors, as the politics of technological supremacy begin to dictate where and when countries can use tech inputs from either the US or China,” he said.
A recent WTW survey of large corporates found that 61% believe political risk levels increased last year. And as concerns over political risk rise, more companies have turned to the insurance market for solutions, according to WTW’s Mr Van den Born. During the more politically stable 1990s and early 2000s, insurance buyers were mostly from extraction industries, but today more “mainstream” companies are buying political risk cover, he said.
“There has been a significant uptick in demand for political risk in the past year, following a large increase in our book over the past three years, particularly from the US. There has been an increase in demand from mainstream corporates as well as from private equity firms,” said Mr Van den Born. “The largest proportion of our political risk book is now in manufacturing, with concerns over disruption to the supply chain – political risk insurance is very much back in vogue,” he added.
The Middle East will continue to drive demand for political risk insurance, according to Mr Barnett. Latin America is also a region of interest to investors, while Greater China territories are increasingly on the radar, he said.
Overall, rates in the political risk market remain relatively flat despite increases in other specialty lines, according to Mr Van den Born. “Rates in the market remain largely a function of individual country risk and the availability of capacity, which remains stable with no significant withdrawals from the market,” he said.
However, the recent civil unrest in Chile and Hong Kong, and resultant claims that have hit the market, have impacted insurers’ appetite and capacity. Ukraine also continues to prove challenging, as does Argentina in the wake of the recent elections, said Mr Van den Born.
Mr Barnett does not anticipate widespread rate increases for political risk cover. “The political risk and trade credit markets have not been subject to significant market losses on the scale that have impacted the property and treaty markets, so we do not currently anticipate any significant tightening of capacity,” he said.