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Geopolitical risk scenarios real and imagined

May 16, 2017

Geopolitical risk scenarios collide with real geopolitical risk, and risk managers should take notice.

International flags

Last month, Venezuelan authorities seized a U.S. auto manufacturer’s plant in what the carmaker called an “illegal judicial seizure of its assets.”

The news of the government action came just days before the release of a report on geopolitical risk from Zurich Insurance and the Atlantic Council. The report examines best-, worst- and base-case scenarios for three geopolitical trends and the potential impact for businesses and the world at large. It also highlights risk mitigation solutions for each scenario.

Using quantitative modeling, the report, “Our World Transformed: Geopolitical Shocks and Risks,” maps out the what-ifs for each scenario. But even without these sophisticated forecasting techniques, it’s not hard to see that geopolitical risk is on the rise and that global businesses are in the crosshairs.

One need only read the news from Venezuela to be reminded how geopolitical risk can impact a company’s bottom line.  Claims data from Zurich’s Credit & Political Risk unit bear this out.

For many business leaders, the rewards of playing in the global marketplace far outweigh the risks. So, regardless of geopolitical tensions, international business is likely to remain active.

But risk managers cannot ignore these evolving risks—nor should they. 

The Zurich/Atlantic Council report examined three geopolitical risks that—alone and collectively—could impact global businesses: the rise in global protectionism; energy crisis stemming from Middle East conflict; and water and food scarcity. Each of the worst-case scenarios for these geopolitical trends brings tremendous business risk.

For example, increased protectionism could lead to trade restrictions and, ultimately, to supply chain disruptions. It could also raise costs for manufacturers in the form of higher inventory handling costs, alternative sourcing options from higher-cost suppliers and transportation delays due to border controls and customs charges.

A rise in oil prices can have a significant impact on the economics behind global supply chains, such as transportation costs.

And water is a precious commodity that is literally drying up in some places, forcing businesses to carefully manage this resource and the risks associated with not having enough. While agriculture is, by far, the largest water user, this exposure can affect all types of businesses, including food and beverage companies, chemical companies and manufacturers, to name a few.

While many exposures lie beyond the horizon, it is critical for risk managers to understand how geopolitical trends on the other side of the globe can impact businesses at home if they are to develop strategies to mitigate the risks.

In the United States, it is often said that “all politics is local.” Never forget that geopolitical risks, while global in nature, can also have a local impact.