UnivOfGuelphNov26th

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 forPolitical 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 forPolitical 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