Geopolitical Tensions Driving Political Risk Losses Higher Around the World

Political risk losses are rising around the world, thanks largely to rising geopolitical tensions, according to a new survey from Willis Towers Watson and Oxford Analytica.

Approximately 55 percent of global companies with revenues higher than $1 billion have experienced at least one political risk loss above $100 million in value. Around 60 percent said that political risk levels spiked since last year, and close to 60 percent said they scaled back operations in a given country due to political risk concerns or losses, the survey found.

“It is clear from our findings that political risk has increased significantly, now becoming a reoccurring and material cost of doing business,” Paul Davidson, chairman and chief executive officer, Willis Towers Watson Financial Solutions, said in prepared remarks.

He added that higher political risk concerns will have implications if companies don’t take proper steps to manage them properly.

“If these levels remain elevated, companies will fall under increasing pressure from shareholders for greater levels of transparency around the losses actually incurred,” Davidson said. “Companies will need the ability to monitor, quantify and manage these risks as well as develop strategies to mitigate them.”

Simon Coote, deputy director of Oxford Analytica, said that companies can no longer avoid political risks as part of daily global business planning.

“To better mitigate political risk exposure, companies need to reframe how they operate,” Coote said in prepared remarks. “Taking steps to manage political risk must become a requirement of doing business, not simply regarded as an inevitable cost of operating in challenging environments.”

Among other survey findings:

• Emerging markets provided a particular point of concern in terms of political risk. The Willis Towers Watson/Oxford Analytica survey found that political risks implications in emerging markets such as Turkey and Argentina are rising due to political instabilities.

• Exchange transfer was the most frequently reported political risk-related loss, impacting nearly 60 percent of those experiencing losses. About 48 percent of respondents said political violence led to losses, and another 40 percent blamed import-export embargoes.

• U.S. sanctions policy, emerging market crises, protectionism/trade wars, and populism and nationalism were seen as the key geopolitical threats among companies.

• While Russia and Vietnam were most frequently cited as countries where losses occurred, Africa, Asia Pacific, Europe, Latin America and the Middle East also produced losses.

• More than 70 percent of respondents said they were pulling back from a planned investment because of political risk concerns.

• Larger companies more commonly developed risk-avoidance strategies. About 82 percent of companies with more than $1 billion in revenue said they scaled back investments, and 86 percent disclosed avoiding future investments.

To compile the annual Political Risk Survey, Willis Towers Watson and Oxford Analytica interviewed senior executives of 40 executives of major global firms across different industry sectors to determine their response to ongoing global political volatility. Firms were from a cross section of industries including food and beverages, oil and gas, mining, pharmaceuticals, real estate, automobiles, and utilities. The companies are mainly headquartered in Europe, Japan and North America and have extensive global operations, according to Willis Towers Watson/Oxford Analytica.

Source: Willis Towers Watson/Oxford Analytica