Political risk continues to climb the agenda, but where are the risk managers?

Whenever we carry out discussions with risk managers as part of our annual European Risk Frontiers survey, the inevitable first question is often: so, what are the big risks that keep you and your bosses awake at night?

Having tackled that big question, the next natural question is: so, what is the most effective way to identify, measure and manage these risks and which other departments within the company do you need to work with to come to the most effective arrangement?

Then, the third question follows: how much of this risk would you like to retain and how much would you like to transfer, is there adequate capacity at an acceptable price and how would you like to see the coverage improved?

The problem with this natural succession of questions is that answers to the first question on big risks are usually dominated by macro issues over which the average risk and insurance manager has little, or only marginal, involvement. Often there are limited, if any, viable or affordable risk transfer solutions.

The big risks usually identified are economic and political volatility, trade wars, credit concerns and protectionism, political risk, interest rate and currency fluctuations, ever-rising levels of regulation, growing corporate and social responsibility, a shortage of skilled young staff and, of course, cyber.

There is only one of these big risks for which there is a healthy and growing risk transfer market and in which risk and insurance managers are becoming increasingly involved – cyber. But this must be tempered by the fact that cyber risk management and transfer is still very much a work in progress.

Risk managers are generally still struggling to wrest control of cyber risk from the IT department and, while growing, the cyber insurance market offers still woefully inadequate limits for the biggest corporations.

And, of course, there is growing fear that the rise of cyber exclusions as insurers come to terms with potential accumulation risk will make the coverage itself more difficult to justify on a cost-benefit basis.

Staffing risk is, of course, firmly in the lap of human resources (HR). There are positive signs of risk and insurance managers becoming more involved in this area as they offer their services to HR to more efficiently procure and manage employee benefits, ideally via the captive and within the global programme. This is an area that we will increasingly cover, but it remains again very much a work in progress.

Currency and interest rate risk is firmly in the hands of treasury, regulation sits with legal and compliance.

So that leaves political risk. It is arguably the most difficult risk of all to identify, measure and model. But that does not mean it is not possible. Expert firms such as Oxford Analytica, IHS and Control Risk, to name but three, are developing interesting and useful tools to help companies formally identify and grade their political risks.

There is also, of course, a well-established credit, political risk and terrorism (CPRI) insurance market. It offers a range of solutions to corporations as they continue to expand further afield in search of new markets, production facilities and support functions.

Risk managers across Europe bemoan the continued level of ignorance at board level and across the company about the real value they can bring. Insurers and brokers say the same thing about insurance.

But during a recent interview carried out with the managing director of leading independent London-based CPRI broker BPL Global, James Esdaile, said the vast majority of clients are financial institutions and contact with the risk management community remains frustratingly limited.

This is confirmed by the common answer we receive in our discussions with risk managers when we move onto questions two and three in the list above. After talking about political risk for a long time, they concede that actually they have very little role in its management and potential transfer.

This seems very odd. If political and economic volatility and uncertainty, trade wars, credit concerns and protectionism are right up the top of the list of things that keep risk managers and their bosses awake at night, why are they not more involved? This looks like another great opportunity for risk managers to show their value to the board and deliver some truly useful solutions.

We would love to hear what is preventing this from happening and how this potentially fruitful source of added value for Europe’s risk managers can be unleashed. Send us your thoughts!