Political Risk

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Political Risk
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Agenda

• Introduction
• Terrorism
• Political Risks
• Global Scenarios
• Risk Management Options
• Political Risk Insurance
• Questions

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Risk Response Options

• How can political risks be evaluated and managed?
• Evaluate exposures
• Structure responses to reduce/mitigate risks
• Consider risk transfer solutions including
• ADD
• KR
• Political risk

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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

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Causes of political risk to investors
Political risks emerge where drivers are not
mitigated by restrainers
Driving forces
Restraining forces
Anti-foreign ideology
Need for foreign investment
Political violence
Investor govt influence
Economic problems
EQUILIBRIUM
Strength of law and order
Unstable polity, active military
Risk transfer activities
Border disputes War
Integrated local business community
Scrutiny by NGOs, etc
Environmental issues
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Business-government relationships
Financial flows
Foreign trade policies
Trade patterns
Government change
Competition rules
Trade tariff issues
Host government
Home government
Investor
Technology flows
Rules regulations
Inter-firm pricing
Taxation
3rd party authority
People movement
MA policy
Embargo
Legal practices
Embargo
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Yesterdays Risks

• Post-colonial expropriations
• Indonesia
• Nationalization by left-wing regimes
• Cuba
• Violent revolution
• Iran
• Balance of payments crises
• Mexico

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Todays 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)

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Tomorrows Risks?

• Transitional regimes
• Central Asia
• Terrorism
• Afghanistan
• Targeting US, Western symbols
• Turkey, Kenya, Saudi Arabia
• Shifting global relations
• Economic crises
• Argentina, Venezuela...
• Deflation?
• ..and?

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Political Risk screening areas
Economic factors Size of GNP and growth
rate Nature of development plans Resistance to
recession Forex methods etc
Geographical factors Infrastructure Raw
materials Distance to markets etc
Capital factors Local availability Banking
system Home country attitudes etc
Business methods General ethics Marketing
system Profit structure
Political factors Government stability Conflict
between social groups Attitude towards foreign
investment Nationalisation threats etc
Labour factors Availability of qualified
staff Labour climate Social costs etc
Firm-specific factors
Tax factors Rates Morality Incentives etc
Governmental factors Fiscal and monetary
policies Competence of bureaucracy Fairness of
courts etc
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Controlling the risks buffering

• Borrow at home/elsewhere
• RD outside host
• Decision-making outside
• host
• Control IP
• Licensing, franchising

Home government
Avoid exposure
Influence
Investor
Host country
Risk takers
Transfer
Integration

• Borrow locally
• Form JVs
• Employ local staff

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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

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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?

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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

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Types of Terrorism
Activists / Pressure Groups
Domestic
International
Cranks Criminals
Foreign Terrorist Groups
Cranks and Criminals
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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

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Targeting

• The key point Al Qaedas 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

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The Al Qaeda record sheet

• Government and diplomatic buildings
• Commercial landmark buildings
• Expatriate compounds
• Jewish/Israeli targets
• Sea vessels

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Domestic

• Islamic extremism
• Algeria, Saudi Arabia, Pakistan, Indonesia
• Nationalism / separatism
• Northern Ireland, Basques, Sri Lanka, Turkey,
  Indonesia
• Occupation
• Iraq
• Gaza Strip West Bank

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International political

• Taking domestic terrorism elsewhere
• Kurdish separatists in Europe
• Algerians in France
• Chechens
• Palestinians
• Iraq?

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Activists / Single Issue Groups

• Animal rights
• Anti-abortionists
• Anti-hunting
• Anti-GMO
• Contingent threat?
• Co-locational
• Associated

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Cranks and criminals

• Loners
• Kids
• Extortionists
• Snipers
• Racists
• Can produce disruption as big as real
  terrorism!

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Types of device
Time
Command
Booby Trap
Projected
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The terrorist threat in Canada

• International terrorism
• Specific threat
• In protest against Ottawas 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

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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

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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

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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

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Risk Management Solutions

• Risk management options
• Terrorism risk management through analysis,
  consultancy and surveys
• Political risk management

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The Insurers Perspective

• When is political risk a particular concern?
• Recent examples of political risks
• Reducing/Managing Political Risks

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Advantages of Political Risk Insurance

• Balance sheet protection
• Helps in project financing
• Governance tool
• Insurance provider can assist in avoiding,
  minimizing and recovering losses

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Investment

• What Types of Investments can be Insured?
• Fixed Assets (Foreign Direct Investment)
• Mobile Assets
• Inventory
• Owned or Leased Equipment

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Political Risk Insurance Perils

• Perils
• Confiscation, Expropriation and Nationalization
  (CEN)
• Currency Inconvertibility (CI)
• Political Violence (PV)

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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.

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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

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Investment Perils

• Political Violence
• Physical damage to assets from
• Revolution, Terrorism, Sabotage, Strikes, Riots,
  Civil Commotion
• War, Civil War

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Investment Perils

• Currency Inconvertibility
• Inconvertibility vs. transfer
• Devaluation not covered

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Who are the Markets forPolitical 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

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Who are the Markets forPolitical Risk Insurance?

• Private Markets
• AIG
• Lloyds
• Zurich
• Sovereign
• Chubb
• How do the markets differ?

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How do the Markets Differ?

• Capacity
• Length of cover (especially War)
• Cost
• Speed of response/flexibility
• Credit quality of underwriter
• Other

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Pricing

• Base rates
• Risk-based pricing
• Other factors
• Demand/Capacity constraints
• Structure
• Term

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Political Risk Losses

• Political Risk Losses arise from
• Acts of government
• Ineffective local law and justice
• War and revolution
• Hard currency shortfalls

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Claims Distribution
Claims byRegion
Claims by Industry Group