Political Risk : Political Risk
Agenda : Agenda Introduction
Terrorism
Political Risks
Global Scenarios
Risk Management Options
Political Risk Insurance
Questions
Risk Response Options : Risk Response Options How can political risks be evaluated and managed?
Evaluate exposures
Structure responses to reduce/mitigate risks
Consider risk transfer solutions including:
AD&D
K&R
Political risk
Political Risks : Political Risks Global Political Risk
What are political risks? Why are they important?
Risk patterns and trends: where is riskiest, and why?
What do these risks mean for travellers and investors?
Where are foreigners are risk of kidnap and unlawful detention?
What do these risks mean to sponsoring organizations
Causes of political risk to investors : Causes of political risk to investors EQUILIBRIUM Restraining forces Driving forces Need for foreign investment Investor govt influence Strength of law and order Anti-foreign ideology Political violence Economic problems Environmental issues Unstable polity, active military Scrutiny by NGOs, etc Border disputes; War Risk transfer activities Integrated local business community Political risks emerge where drivers are not mitigated by restrainers
Business-government relationships : Business-government relationships Financial flows Trade patterns Competition rules Technology flows Inter-firm pricing People movement Embargo Foreign trade policies Government change Trade & tariff issues Rules & regulations Taxation M&A policy Legal practices Embargo Investor Home government Host government 3rd party authority
Yesterday’s Risks : Yesterday’s Risks Post-colonial expropriations
Indonesia
Nationalization by left-wing regimes
Cuba
Violent revolution
Iran
Balance of payments crises
Mexico
Today’s Risks : Today’s Risks Economic crises
Argentina (repatriation restrictions)
Indonesia (contract abrogation)
Armenia (licence revocation)
Creeping expropriation
Ukraine (output quota restatement)
Dysfunctional legal/regulatory systems
Russia (abuse of minority shareholders)
Non-governmental organisations
Burma (corporate exodus)
Ethnic, religious and separatist conflicts
Sri Lanka (attack on airport)
Decentralization of power
India (contract abrogation)
Tomorrow’s Risks? : Tomorrow’s Risks? Transitional regimes
Central Asia
Terrorism
Afghanistan
Targeting US, Western symbols
Turkey, Kenya, Saudi Arabia
Shifting global relations
Economic crises
Argentina, Venezuela...
Deflation?
…..and…?
Political Risk screening areas : Political Risk screening areas Economic factors
Size of GNP and growth rate
Nature of development plans
Resistance to recession
Forex methods
etc Political factors
Government stability
Conflict between social groups
Attitude towards foreign investment
Nationalisation threats
etc Governmental factors
Fiscal and monetary policies
Competence of bureaucracy
Fairness of courts
etc Geographical factors
Infrastructure
Raw materials
Distance to markets
etc
Labour factors
Availability of qualified staff
Labour climate
Social costs
etc Tax factors
Rates
Morality
Incentives
etc Capital factors
Local availability
Banking system
Home country attitudes
etc Business methods
General ethics
Marketing system
Profit structure Firm-specific factors
Controlling the risks: buffering : Controlling the risks: buffering Investor Host
country Home
government Integration Borrow locally
Form JVs
Employ local staff Avoid
exposure Borrow at home/elsewhere
R&D outside host
Decision-making outside
host
Control IP
Licensing, franchising Influence Transfer Risk takers
Information sources : Information sources Online providers
Convenient, consistent, wide range but issues of depth and cost
Management consultancies
Focussed, relevant but issues of knowledge and cost
Academics
Detailed, accurate but issues of business focus
Ex-diplomats
Network and influence but issues of business focus, consistency, depth, cost and range
Business consultants
Business focus but issues of knowledge, relevance, depth
Government
Range, convenience but issues of political bias
Terrorism : Terrorism Global Terrorism
Risk patterns and trends
Riskiest countries and potential targets
Why do terrorists attack, what do they expect to achieve?
Why do Islamic extremists use suicide attacks?
Where would they be likely to attack in Canada?
How is terrorism a risk? : How is terrorism a risk? Direct
Personnel (staff, contractors and visitors) at risk from death and injury
Property at risk of damage Contingent / Indirect
Following direct incident nearby or elsewhere
Leading to:
Interruption to business operations
Transportation delays
Relocation costs
Reduced cash flow
Reputational damage
Liability issues
Slide17 : Types of Terrorism Foreign Terrorist Groups Cranks and Criminals Activists / Pressure Groups International Domestic Cranks & Criminals
International: Islamic extremism : International: Islamic extremism International Islamic extremism is particular because:
No constituency
Iconic targeting
Suicide methods
‘the CNN factor’
Al-Qaeda is a constant and real danger
Afghanistan
Iraq
Saudi Arabia
Targeting : Targeting The key point: Al Qaeda’s aim is to foment a conflict between the West and the Islamic world, so targets are:
Symbolic
Large scale
Guaranteed to generate media coverage
Ignorant of collateral deaths and damage
The Al Qaeda record sheet : The Al Qaeda record sheet Government and diplomatic buildings
Commercial landmark buildings
Expatriate compounds
Jewish/Israeli targets
Sea vessels
Domestic : Domestic Islamic extremism
Algeria, Saudi Arabia, Pakistan, Indonesia
Nationalism / separatism
Northern Ireland, Basques, Sri Lanka, Turkey, Indonesia
“Occupation”
Iraq
Gaza Strip & West Bank
International: political : International: political Taking domestic terrorism elsewhere
Kurdish separatists in Europe
Algerians in France
Chechens
Palestinians
Iraq?
Activists / Single Issue Groups : Activists / Single Issue Groups Animal rights
Anti-abortionists
Anti-hunting
Anti-GMO
Contingent threat?
Co-locational
Associated
Cranks and criminals : Cranks and criminals Loners
Kids
Extortionists
Snipers
Racists
Can produce disruption as big as ‘real’ terrorism!
Types of device : Types of device Command Booby Trap Time Projected
The terrorist threat in Canada : The terrorist threat in Canada International terrorism
Specific threat
In protest against Ottawa’s perceived role in the US-led coalition
Because Canada is Western
Co-locational threat
Supply of targets perceived to be ‘soft’
US, UK, allied targets perceived as too ‘hard’
Domestic terrorism
Political Risks : Political Risks Global Political Risk
What are political risks? Why are they important?
Risk patterns and trends: where is riskiest, and why?
What do these risks mean for travellers and investors?
Where are foreigners are risk of kidnap and unlawful detention?
What do these risks mean to sponsoring organizations
Global Scenarios : Global Scenarios Global scenarios
What are the key drivers for Canada and the world in the medium term?
The best case scenario
The worst case scenario
The most likely scenarios
Key drivers : Key drivers Sociological
Demographics; ageing societies; migration
Technological
Outsourcing; automation
Economic
Economic cycles; energy
Environmental
Pollution; global warming
Political
The Huntingdon hypothesis; Al Qaeda; Single superpower
Legal
Risk Management Solutions : Risk Management Solutions Risk management options
Terrorism risk management through analysis, consultancy and surveys
Political risk management
The Insurer’s Perspective : The Insurer’s Perspective When is political risk a particular concern?
Recent examples of political risks
Reducing/Managing Political Risks
Advantages of Political Risk Insurance : Advantages of Political Risk Insurance Balance sheet protection
Helps in project financing
Governance tool
Insurance provider can assist in avoiding, minimizing and recovering losses
Investment : Investment What Types of Investments can be Insured?
Fixed Assets (Foreign Direct Investment)
Mobile Assets
Inventory
Owned or Leased Equipment
Political Risk Insurance Perils : Political Risk Insurance Perils Perils:
Confiscation, Expropriation and Nationalization (CEN)
Currency Inconvertibility (CI)
Political Violence (PV)
Investment Perils : Investment Perils Confiscation, Expropriation, Nationalization (CEN)
Protects against partial or total loss of investment or asset as a result of acts by the host government that eliminate ownership of, control over, or rights to the insured investment/asset.
Investment Perils : Investment Perils CEN Coverage Enhancements:
Deprivation
Forced Abandonment
Forced Divestiture
Contractual Investment Risks
Arbitration Award Default
Embargo
Non-honouring of guarantee
License Cancellation
Business Interruption
Investment Perils : Investment Perils Political Violence
Physical damage to assets from:
Revolution, Terrorism, Sabotage, Strikes, Riots, Civil Commotion
War, Civil War
Investment Perils : Investment Perils Currency Inconvertibility
Inconvertibility vs. transfer
Devaluation not covered
Who are the Markets for Political Risk Insurance? : Who are the Markets for Political Risk Insurance? Government Providers
Export Credit Agencies:
EDC (Export Development Canada)
OPIC, ECGD, etc.
Multilaterals: MIGA, IDB etc.
Private Market: AIG, Lloyds, Zurich, Sovereign, Chubb…
Who are the Markets for Political Risk Insurance? : Who are the Markets for Political Risk Insurance? Private Markets
AIG
Lloyds
Zurich
Sovereign
Chubb
How do the markets differ?
How do the Markets Differ? : How do the Markets Differ? Capacity
Length of cover (especially War)
Cost
Speed of response/flexibility
Credit quality of underwriter
Other
Pricing : Pricing
“Base” rates
Risk-based pricing
Other factors:
Demand/Capacity constraints
Structure
Term
Political Risk Losses : Political Risk Losses Political Risk Losses arise from:
Acts of government
Ineffective local law and justice
War and revolution
Hard currency shortfalls
Claims Distribution : Claims Distribution Claims by Region Claims by
Industry Group