Politics

Political Violence Events Now Impacting One In Four Global Organizations

Political Violence Events Now Impacting One in Four Global Organizations, latest Clements Worldwide Risk Index Reveals

Executive Summary

Since the previous edition last Fall to the results reported in the current 2017 Winter/ Spring edition of the Clements Worldwide Risk Index (CWRI), there is a startling 90% growth in the number of companies stating that they had suffered a political violence event in just the past 12 months. That corresponds to 25% of all 511 respondents in this edition of the CWRI. This is just one of the indicators pointing to how political disruption, specifically political violence, terrorism and changes in legislation, are affecting businesses in 2017.

Terrorism has consistently been a top concern for respondents, ranking #2 in our last three CWRI editions. It is one of the risks respondents feel least prepared to address. This year for the first time, respondents indicated that concern had transformed into actual losses. Terrorism ranked as the #2 loss-generating risk, with 12.3% of surveyed participants indicating it was the source of greatest loss.

Political violence includes a broad range of perils, such as strikes, civil commotion, riots, demonstrations, and so on. Since the last Fall edition, political violence has moved up to a top 3 concern. It retained its #4 spot in the ranking of top losses with 10.8% of respondents. Losses to political violence have become “standard operating practice,” suggesting businesses need to find ways to address it. Political violence also joined the top 5 list of risks for which respondents feel least prepared to address (#4).

Legislation, which rounds out the trifecta of risks associated with political disruption, was added based on reader input. It ranked third in its first time being tested, with 11.2% of respondents. Additionally, 16.6% of respondents listed changes in legislation as their top concern.

Cyber liability has also been a consistent risk on the concern list. This year it is the #1 cause of losses, with 15.3% ranking cyber liability as their top loss, and 24.5% ranking it as their top concern. These four risks share one commonality: they are man-made.

Global risks did not just result in capital losses for respondents; they are continuing a trend of impacting future business growth. Despite new insurance products being available that could help mitigate international risk, the number of respondents who answered that concerns about risk had caused them to delay their expansion plans has increased from the previous 27% of respondents who delayed their plans due to global risks in the beginning of 2016 to 37% in the current 2017 Winter/ Spring edition of the Clements Worldwide Risk Index.

Political Violence

About CWRI

Clements Worldwide conducted an online survey from November to December 2016, targeting executives at multinational organizations who are responsible for global risk management within their organizations. Respondents to this survey represented the IT, manufacturing, construction, government, banking, transportation, NGO, tourism, education and oil and gas sectors. This year, 511 companies responded to the survey, up from 409 for this survey’s 3rd edition, in the Summer/ Fall 2016.

The goal of the Clements Worldwide Risk Index has been to provide actionable data on risks that produce significant losses for global operations versus risks that may be perceived as most concerning, but may not actually be causing major financial dislocation across international organizations. However, such perceptions may portend future mitigating action against those risks
by responsible managers. This information should be used by risk managers to adequately plan for expansion and foster global growth. At Clements, we are committed to providing unique solutions to such risks, allowing our customers to continue to expand globally, including into high-risk markets.

Political Violence

Political Violence

One in four global organizations experienced a political violence event in the past six months, which was a 56% increase from a year ago, according to a comparative analysis of the last two editions of the Clements Worldwide Risk Index (CWRI). The current issue (Winter/Spring 2017) indicates that the highest percentage of those events took place in Europe, against conventional wisdom that political violence tends to happen in the Middle East, Africa or even Latin America. A total of 22.7% of respondents said they had experienced an incident of political violence in their operations in Europe, whereas 21.1% reported a political violence incident in the Middle East. In Africa, reported cases of political violence had an impact on 17.2% of the businesses surveyed.

It appears that violent political events such as riots, civil unrest and labor strikes are occurring more frequently, and are no longer isolated to known, politically unstable hot spots. This past year, Europe has seen terrorist attacks in France, Germany and Belgium. In the aftermath of these attacks, businesses in Europe are becoming increasingly concerned about how these violent acts are affecting their operations.

The leading concern for businesses when it comes to political violence was the uncertainty around elections, specifically protests around elections, and the disruptive impact this may have on businesses. Some 27.2% of respondents indicated they are worried about the impact of elections in countries where they operate, up from 19.1% the year before.

Companies have legitimate reasons to be worried about the potential violence associated with elections as history has demonstrated.

  • Ahead of the Manipur assembly elections in India in March 2017, several candidates received threats and were attacked with bombs and guns by unidentified individuals, police reported at the time.
  • In Ghana after the election results were announced in March 2017 and Nana Akufo-Addo was declared the president-elect, widespread violent protests took place.
  • The Kenyan government recently agreed to pay £4.2 million compensation to Rwandan and Ugandan firms after post-election violence n 2007 and 2008 in Kenya led to large losses for those firms. Around 1,200 people died and 600,000 were displaced in clashes that erupted after the poll. Talk has now turned to ensuring this does not happen again in their next election, according to news sources.

Many notable elections are set to dominate the news in the coming year, and many of them are expected to be controversial and could result in protests and riots. Elections across Europe in 2017 are expected to see gains for populist parties in France, Italy and Germany. Other important elections taking place this year include Iran’s presidential election in May; Rwanda’s and Kenya’s general elections in August; South Korea’s presidential election in May (following the recent impeachment of President Park); China’s Politburo Selection and Thailand’s general election in late 2017.

Businesses should prepare now for potentially violent political disruption that might occur around these elections.

Another emerging risk is currency fluctuations, with 19% of respondents answering they were concerned about the losses they might incur due to currency fluctuations in the countries in which they do business.

Currency fluctuations are the chief area of concern for members of the oil & gas (35.7%), tourism (31.3%) and banking (29.5%) – all of these industries operate across multiple jurisdictions and are significantly affected by changes in exchange rates.

Another major concern for business is the threat of an economic downturn and subsequent public unrest and demonstrations. Some 16.2% of respondents in this survey were concerned about the impact of an economic downturn on their operations, up from 10% the year before.

In the World Bank Group’s Global Economic Prospects, it is reported that stagnant global trade, subdued investment, and heightened policy uncertainty marked a difficult year for the world economy. The World Bank indicates that growth in advanced economies will increase by 1.8% in 2017, and that emerging markets should grow by 4.2% this year, but the overall outlook is clouded by policy uncertainty in major economies. The World Bank also noted that key risks for businesses stemmed from heightened policy uncertainty in major economies, which will be addressed in the changes in legislation section.

This CWRI edition also points to some industries being more concerned than others by movements in the economy. The threat of an economic downturn caused the largest amount of concern for those in the construction industry. With 37.3% of respondents in this industry worried about the disruptive effects of a failing economy on their business. The global refugee crisis is also beginning to impact business operations, with 11.2% of respondents citing the refugee crisis and subsequent political violence events as a cause for concern, up from 8.2% the year before. A substantial 28.6% of respondents in the oil & gas sector cited the refugee crisis as a politically disruptive event that is likely to impact their businesses in the coming year. Notably, a significant number of respondents in government agencies (15.4%), international schools (15.8%) and IT organizations (14.1%) all expected the refugee crisis to be the chief cause of political disruption in their businesses in the coming year.

The violence, controversy and uncertainty associated with the refugee crisis is clearly a top cause for concern for businesses. So much so that recently, the United National Refugee Agency and the UN Global Compact called on global organizations to create a more welcoming environment for refugees through skill development and employment.

The impact of globalization, the global economic downturn and the increase in religious extremism, among other things, have changed the world and how businesses operate in it. Political violence and its disruption to business is now commonplace and organizations around the world have no choice but to ensure their employees and assets are properly protected in all the countries in which they do business and that their business strategies adequately take into account the various risks.

changes in legislation

The age of legislative and regulatory uncertainty has dawned. The rise of nationalism, changing governments and corresponding changes in policy, trade barriers rising and falling and currency fluctuations, are now all key risks of doing business, not just in emerging markets but around the globe. Legislative is a sub-component of political risk, defined as the risk to businesses from political instability or political change in countries. Legislative uncertainty is partially caused by changes in government, which often lead to new policies and fluctuations in foreign exchange rates, but may also be a result of existing governments responding to economic slowdowns or other socio-economic factors.

According to Daniels, Radebaugh, & Sullivan, the common types of political risks are systemic, procedural, distributive, and catastrophic. Systemic political risk refers to changes in government policy and legislation that might impact a business. It might also refer to changes in the economy such as a downturn, which will influence an organization’s ability to make money in that country. Procedural political risk refers to the cost of complying with a host country’s laws and regulations as well as the level of corruption found in that country. Distributive political risk refers to public interest conditions placed on multinational businesses by the host country. As foreign investors in a host country set up businesses and start to generate profit, the country might look at how this is impacting its citizens and introduce laws ensuring they also benefit from any investment. All of these risks are closely tied to legislative uncertainty.

The fourth type of political risk, catastrophic political risk, is defined as the large and unplanned political changes in a country that affect how businesses operate there. This includes conflict and war, which may make it difficult or dangerous for organizations to continue to operate there. For the purpose of the Clements Worldwide Risk Index, this is more closely tied with political violence.

The election of Donald Trump in the United States, for example, has come with a shift towards protectionism in global trade policy. In addition, the closing of borders, the proposed implementation of trade barriers and the cancellation of multilateral trade deals all signal that nationalist interests will take precedence over an integrated global economy. In general, there has been a revival of interest in trade restrictive measures around the world as protectionism and nationalism take hold. These policy changes increase risks to businesses which must ensure they remain legally compliant by monitoring every country where they operate for new regulations and legislation. They have to comply with various tariffs, taxes and sanctions imposed by countries where they do business.

According to the survey, changes in legislation and regulations are a top loss and concern for all respondents with 11.2% ranking it as their top loss (#3 ranking) and 16.6% answering that it is their top concern (#4 ranking). Additionally, five industries ranked changes in legislation and regulations as either their #1 or #2 loss, including oil & gas (21.4%), IT (16.3%), banking (15.9%), international schools (15.8%), and manufacturing (8.3%).

The potential large losses for companies operating in areas of political and legislative uncertainty are outlined  in a report by FTI Consulting – What companies do right (and wrong) in emerging markets, which surveyed 140 North American and European-based companies with revenues over $1 billion. The report found that along with potential growth, large emerging market investments can generate huge losses – more than $1 billion per company over the past five years. The report said that the losses stemmed from regulatory violations, loss of business and fines resulting from bribery and fraud, and reputational damage from business operations n emerging markets. Walmart, one of the world’s biggest multinationals, has invested heavily in infrastructure and e-commerce around the globe. Walmart used the Worldwide Governance Indicators from the World Bank to evaluate how factors like government effectiveness, the rule of law, control of corruption and government stability affected the risk of non-compliance in facilities in a particular country. This global organization is clearly feeling the impact of global legal compliance and the need to be prepared for the risks inherent in having an international presence.

As multinationals continue to spread across the globe, we can expect legal compliance and political uncertainty to grow in complexity and create increasingly complicated risks for businesses operating across borders. Some of these risks, but not all, are insurable. Including insurance as part of an overall risk mitigation plan is crucial.

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Clements Worldwide is a leading insurance provider for expatriates and international organisations. Founded in 1947, Clements offers international car, property, term life, disability, health, specialty, and high-risk insurance in over 170 countries. With offices in Washington, D.C., London, and Dubai, Clements delivers comprehensive and customized coverage, superior customer service, and unparalleled claims response. For more information on the Clements Worldwide Risk Index and the methodology associated with the survey visit www.clements.com/riskindex. To learn more or receive a quote online, visit www.clements.com.