Today’s interconnected world offers SMEs great opportunities. However, every business is only a few steps away from potential political risk.
What is a political risk for the business?
Political risk is the possibility that your business could be affected by instability or political changes in a country. These include conflicts and unrest as well as changes in government or regime, international relations, or policies between countries.
Political risk insurance provides financial protection to investors, financial institutions, and businesses that face the possibility of losing money
Other factors that can influence a country’s economic health include commodity price volatility, liquidity crises, and sect oral downturns. You can think of the conflicts in the Middle East and the Arab Spring recurrent coups as well as confiscation of assets by local government authorities and disputes over national natural resources. Although these may seem like rare political risks for international business, they can still impact your local business.
Types of political risks
Businesses can be affected by many political risks, including political instability, labor problems, and local product safety. These are the top political risks.
Terrorism, war, and civil unrest
Geopolitical risks can be caused by terrorism, war, and civil unrest. This is a type of political risk map. Pierre refers to Russia’s invasion of its neighbor. Companies with regional interests were affected by the political unrest in Ukraine towards the end of 2013. They were at risk of losing assets due to political violence or other expropriation methods.
A state-owned entity makes a unilateral decision
Another example of a political situation is the unilateral decision by a state-owned entity (‘le fait du Prince’) to unilaterally end a contract with a foreign supplier as a retaliation against a hostile decision by that supplier’s government.
Governments make geopolitical decisions
There are many geopolitical decisions that governments can make at any level to create political risk and impact individual businesses, including foreign trade policy, tariffs, tax regulations, and currency controls.
Sanctions
International business is also at risk from sanctions. Pierre points out that while we expect our insureds to follow international laws if they violate a sanction, it would not be covered. “And, on top of all that, if an insurance company were to pay out on any sanction contract, they would also be subject to these international sanctions.”
Jurisdictional Risk
International business is fraught with political risks, regardless of whether you are a small-sized company looking to expand or a multi-billion dollar company. “Jurisdiction” refers to the laws that will regulate the agreement with your partner. If the terms of the contract are not followed correctly, problems can occur if the partner is located in another country.
A European company that contracts with an African company would, for example, not be subject to the same legal framework under English or French law. The contract would also not be subject to international arbitration to resolve any disputes. Choosing the local law could expose you to unexpected modifications in the local regulation, or difficulties to enforce a decision by a local court. The choice of law that governs the commercial contract is often the responsibility and not an insurance risk. It is important to note that the non-respecting of international arbitration awards can be considered a loss and could therefore be covered by certain insurance policies.
Being able to understand the complex legal environment in your local area can make a huge difference to your ability to manage and withstand political risks.
