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Australian businesses with a presence overseas or which trade with overseas partners need to be aware of and plan for potential geopolitical risks arising from increasingly volatile global factors including supply chain disruptions, problems with border access and the impact of regional tensions or war. These risks can significantly affect business operations, trade and investment so it's wise to take a risk management approach and consider having appropriate insurance in place.
Political risk insurance cover is designed to protect businesses with overseas operations or supply chain relationships from key political events and risks in foreign countries.
Political risk insurance can provide coverage for:
- expropriation: When the host country's government expropriates, confiscates, nationalises and/or takes other actions (including licence cancellation) which leads to loss of assets and/or deprives the business of all or part of its investment in that location
- selective discrimination: When the host country's government imposes a law or import/export restriction which discriminates against the Australian owned business but not similar locally owned entities
- forced abandonment: Which occurs when a business is advised by their own government to abandon a project in response to political violence
- forced divestiture: When a business is required by their own government to pull out of the host country, after a breakdown in relations between Australia's government and the government of the host country
- deprivation: Which refers to cessation or disruption of operations due to being unable to move inventory, equipment, assets into/out of/around the host country
- currency inconvertibility/exchange transfer embargo: When the business is prevented or restricted from converting local currency to hard currency or remitting funds outside the host country
- political violence: Which refers to loss or disruption to the business's investment due to physical loss or damage resulting from acts of terrorism, sabotage, riots, strikes and/or civil unrest, malicious damage, insurrection, revolution or rebellion, mutiny and/or coup d'état, war and/or civil war
- repudiation, termination or other breaches of commercial agreements with government and public sector entities
- embargoes: Import and/or export.
What types of businesses can benefit from political risk insurance?
From multinational corporations to small import and export businesses, the range of businesses exposed to political risk includes anyone with global dealings as part of their business operations and networks.
Infrastructure development companies across the construction, energy and natural resource sectors are strong users of political risk insurance often working in unstable political regions. Financial institutions with loans and investments operating across geopolitical regions are also key business types who leverage this type of risk protection.
10 'red flag' conditions that indicate high political risks for businesses
While businesses can control and manage internal risks within their operations, external threats can be difficult to predict and provide for. Some of the following risks are not insurable, but many are. Broadly, these 'red flag' conditions indicate high political risk and involve:
- Trade tensions between major global economies, such as the United States or China, can have direct impacts on Australian businesses reliant on international trade, with disruptions affecting exports and imports.
- Australia's geographic position makes local businesses vulnerable to regional instability. Territorial disputes in the South China Sea, for example, could seriously impede Australian businesses operating in neighbouring countries.
- Changes in foreign trade and investment regulations can disrupt Australian businesses, particularly those that rely on foreign investment or which operate overseas. Recently, Australia has implemented stricter controls for safeguarding key assets and industries1.
- Cyber espionage and attacks can be a component of geopolitical tensions.
- Geopolitical tensions: resource nationalism represents an additional layer of complexity with potential to interrupt trade and investment across energy and critical minerals sectors in particular.
- Changes in international climate change and environmental agreements and policies have the potential to affect regulations, pricing and market access for Australian businesses involved in carbon intensive industries.
- Spiralling costs combined with changes in financial markets have heightened focus on government expenditures and infrastructure programs, or governments' willingness or ability to fund previously announced projects or programs.
- Geopolitical unrest or warfare can disrupt global supply chains creating delays in dispatching or receiving goods and materials.
- As COVID-19 has shown, global health crises can have far-reaching effects on business activities including operations, travel and consumer behaviour.
- In some regions, businesses that rely on patented technology or unique intellectual property rights over innovations may face challenges in protecting their assets.
Risk management considerations for businesses with global dealings
A variety of what once might have been characterised as 'black swan' events have played out with increasing frequency in recent years and in unexpected ways, such that multinational businesses could face increasingly difficult environments where a one size fits all, set and forget strategy global political risk strategy won't be adequate. Businesses need to remain vigilant to this rapidly changing global environment and ideally a sufficiently agile business strategy to respond to individual geopolitical issues and rapidly shifting social values, and adapt to evolving risks in the regions concerned if required.
In developing risk management strategies businesses with global networks should seek to stay abreast of relevant changes across their geographical environments and should consider conducting risk assessments, such as confidence in the regional governments concerned. Lack of trust and public scepticism increase the risks of consumer boycotts, reputational damage and legislative crackdowns by regulators.
It also makes sense to spread the risk by diversifying markets and or supply chains in situations where the political and economic status of countries and territories could combine to create challenging conditions for Australian businesses.
Some eligible businesses may benefit from support from government agencies2. The Australian government manages a number of financial assistance schemes. Australian exporters and importers can access several types of financial assistance including grants, loans and duty concessions. These schemes help local businesses sell their products around the world. Most state and territory governments also offer support for exporters.
In times of global volatility and political risk insurance protection may form a critical part of a business's risk management strategy. Our specialists can help give you the confidence to build for your business future with the knowledge that you are protected against unpredictable eventualities.
