How exposed is your balance sheet to geopolitical risks?
March 28, 2016
North American companies are at increasing risk from global events.
The World Economic Forum’s Global Risks Report 2016, produced in collaboration with Zurich, shows a growing intensification of geopolitical risk, particularly in emerging markets. Social and political unrest is especially high in countries where North American companies are expanding operations or sourcing key supplies—emerging markets located in the Middle East, Russia, India, Latin America and Africa.
According to Verisk Maplecroft’s 2016 Political Risk Outlook, there were more than 7,750 terrorist attacks in 2015, concentrated in the emerging market geographies in particular. It’s now becoming very apparent that civil war, ethnic intrastate fighting and international clashes are becoming part of our everyday business environment. At Zurich, we can see this new reality of geopolitics affecting economics with the increase in political risk and trade credit claims.
After 2010, we began to see increased claims for losses such as non-honoring of state-owned enterprise payment obligations, political violence and forced abandonment. Since 1997, Zurich has paid more than million in credit and political risk claims. Some examples of recent claims include:
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| Zurich issued a multi-country political risk policy to a large participant in the global energy sector for losses caused by, among other things, political violence, forced abandonment and deprivation. When hostilities broke out in Yemen, the customer had significant assets in the county and suffered losses from government destabilization and the increasing violence, which forced an evacuation of its personnel from Yemen. | |
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| The extended hostilities in eastern Ukraine have generated many types of claims in the political risk market. In 2014, one of Zurich’s customers in the consumer products sector suffered severe damage to one of its facilities in the Donetsk region. The location was ultimately destroyed by the warring factions, resulting in a total loss of the property. | |
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| Zurich provided Arbitration Award Default (AAD) coverage to an investor in the energy sector for a project that depended on payments from a state-owned enterprise (SOE) in Russia. The SOE defaulted on its obligations under the contract and subsequently failed to honor the arbitration award obtained against it. |
The increasing frequency and severity of geopolitical risks can catch North American businesses by surprise and negatively affect their firms' balance sheets in particular.
Fixed assets and equity investments are exposed to risks like war, civil war, terrorism, expropriation and currency inconvertibility. Accounts receivable are exposed to the risk of default by buyers, and the reason for that default could be anything: political risks, massive depreciation of the buyer’s currency, bankruptcy or sovereign default, etc.
For customers with trade credit exposures, we recommend updating the organization's credit procedures to pay special attention to buyers and countries that are particularly commodity-price dependent. And while no organization can control the geopolitical and economic events happening around the world, organizations can choose risk-transfer mechanisms to cover events like those listed above. Read more about Zurich’s global risk transfer for trade credit and political risk in this Claims Payment Overview.