How Should Multinational Companies Manage Political Risk?

In a previous post, I mentioned the rise of cyber insurance for businesses and some of the problems associated with it. A recent article in Strategic Risk discusses the growing demand for political risk insurance, especially for companies working on projects in sub-Saharan Africa. The idea is for a company to protect its overseas projects and investments against unexpected political ruptures, such as wars, terrorist attacks, revolutions, and unstable governments.

Similar to insuring against cyber threats, political risk insurance is still a relatively new and developing product. The article states:

Demand for this type of insurance is growing but the region’s political instability makes securing appropriate insurance difficult.

Ironic, isn’t it, that a product designed to protect against the political instability of a region is difficult to secure because of…a region’s political instability.

It is nearly impossible to predict what Ian Bremmer calls “black swan events”: large, unexpected political and financial crises. A corporation working on a project in, say, Equatorial Guinea cannot afford to spend money and resources planning for everything from civil wars to coups and all the various forms and permutations of these events. Or perhaps they can afford it, but do not believe it is an efficient use of resources.

It is my humble opinion that analysts are good at analyzing, not predicting. After things erupted in Ukraine and Russia took Crimea, regional experts wrote articles for newspapers and journals in a tone that suggested they knew all along this would happen—even though none of them wrote anything before the crisis that predicted it would happen. It doesn’t mean they are dim; it just means that they are not soothsayers. No one is, so a risk management model based on soothsaying is bound to fail.

It is much more efficient for companies to draw up contingency plans based not on particular events (such as “What do we do if the military takes control of the government and closes the borders?”) but on making sure they are prepared to weather the storm, as it were. Again, listen to Mr. Bremmer (Ian, not Paul):

The rule of thumb in political risk is that it’s impossible to predict black swans, those devastating shocks that are out of left field. But even so, you can try to predict how countries, companies, and people will react to these shocks. It’s not whether you get knocked down, but how — or whether — you get up.

What do you think?

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