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Analysis reveals political risk exposures around the world


January 29, 2015   by Canadian Underwriter


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Oxford Analytica and Willis Group Holdings have announced the availability of a new political risk model to help companies assess financial exposure to political risks, the identification and management of which represents a significant and increasingly pressing challenge for boards of global companies.

Calling the offering the first of its kind, the model allows global companies to assess and compare the financial implications of exposure to a suite of political risks – in individual countries, regionally or globally, notes a joint statement Wednesday from Oxford Analytica, an international consulting firm, and Willis Group Holdings, a global risk advisor, insurance and reinsurance broker.

The model – called VAPOR, Value at Political Risk – initially covers six different political risk perils, across 11 different industry types in 100 countries.

Investors in Ukraine can expect to lose US$34 in every US$100 invested over 10 years, according to a report from Oxford Analytica and insurance broker Willis Group

Political risks – common examples include expropriation, political violence and the imposition of trade sanctions – are threats posed to businesses by political upheavals or social change, the joint statement notes. Inherently unpredictable, these risks often have catastrophic consequences.

“VAPOR takes a probabilistic approach that assesses whether a particular society is more or less vulnerable to experiencing a suite of discrete political contingencies over time – and then estimates the possible cost, over time, of these contingencies to business,” Sam Wilkin, Oxford Analytica’s senior advisor, political risk, says in the statement.

Related: No new political risk coverage being written in Ukraine: Marsh

The model “offers a potential solution to the challenge of putting dollar values on political risk – for the first time,” adds Paul Davidson, CEO of Willis Financial Solutions. “This capacity does not currently exist anywhere; an ability to compare the financial impact of political risk exposure, in real dollar-value terms and by industry, will give corporate risk managers and financial planners a competitive edge,” Davidson says.

Related: Canadians Go International

Snapshot findings using the model include the following:

• companies investing in North Korea can expect an estimated political risk loss of US$40 in every US$100 invested over a 10-year period;

• investors in Ukraine can expect to lose US$34 in every US$100 invested over a 10-year time frame as a result of political risks, stemming from the increased threat of escalating conflict and the country’s challenging economic situation;

• companies can expect to lose US$20 in every US$100 invested in Venezuela over a 10-year horizon as a result of political risks arising from oil price volatility, political upheaval and the possibility of a sovereign default (the expected loss in the United States and United Kingdom for those same risks is comparatively low at US$1 in every US$100); and

• investors in China, given the threat of government intervention, can expect an estimated loss of US$9 in every US$100.

The model will provide “businesses the ability to evaluate the costs of geopolitical risks when deciding which industry and country to invest in,” Wilkin says.

Adds Davidson, “Companies that can estimate the cost of political risk contingencies over time to their underlying business operations will see a step-change improvement in their strategic planning and risk management processes.”


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