Decision time–comment

The chaos witnessed in Cyprus as the banking system ground to a halt affecting the unfortunate citizens of the country, along with the many foreigners who had chosen to domicile their savings there for different reasons, laid bare the exposure of all of us to political risk on a personal and corporate level. The ‘rescue package’ that would determine the fate of the Cypriots was determined by macro political and economic factors way beyond their control, such as the impending German elections. In the case of Cyprus the complexity of the exposure was made all the more obvious because this small nation and its citizens were so reliant upon big decisions made far away by politicians in other countries of Europe with no vested interest in the country.hideThis case will provide risk managers in all countries of Europe and worldwide with serious food for thought. There is clearly a high level of uncertainty and concern about policymaking at the national, regional and global level as politicians who are generally ill-equipped and motivated to make rational decisions on long-term economic questions try to gain votes by adopting ever more eye-catching ‘solutions’. The root of this concern is not so much the substance of the increasingly volatile and extreme strategies adopted, but rather their impact on expectations. As any historian of economic history will attest, expectations are really what drive economics because they are the real determinants of demand and supply. And as any investor will tell you, expectations are never really helped by rising political volatility and uncertainty. Increasingly extreme political and regulatory reactions lead to even lower expectations, which dampen growth prospects even further. The contrast between the fortunes of Japan and China in recent times is an extreme example of the power of expectations in economic life and how political strategy and risk really does matter. Our recent expansion through Commercial Risk Africa has also highlighted the huge impact of political risk as companies keen to tap into the huge potential offered by Sub Saharan Africa nervously eye religious and political tensions to the north and the damaging impact of corruption and self interest to the south. What seems obvious from our research with risk managers in Europe and worldwide is that any modern company with a reasonably coherent growth plan has to look beyond its borders. This means that they can no longer simply focus on delivering the best quality product to customers at the best possible price in a micro economic bubble. All the environmental factors, not least political, that drive and influence the global economy have to be taken into serious consideration and risk managers must wake up to this fact and become involved. This is arguably the core reason for the creation of PARIMA in Asia this month. John Phelps, President of RIMS, summed it up neatly in an interview with CRE as we prepared to travel to the US to report on this year’s annual conference in Los Angeles. He said that RIMS has to focus on helping younger risk managers in particular develop their potential and show the exciting career path that risk management offers nowadays. He also said that RIMS will focus on supporting its members overseas in a more strategic way as their operations expand. This seems like a sensible strategy given this fast-developing environment. It would, however, make a lot of sense if RIMS and the other associations and federations around the world got together and tackled this in a coherent and global way. Perhaps start with the Ifrima meeting at RIMS this month?

Decision time–comment

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