Protecting foreign assets from impacts of geopolitical risk and political polarisation

Businesses are concerned by insurance coverage available to them in the wake of the current geopolitical landscape. Of most concern are standard exclusion clauses for damage or loss due to war, civil unrest and terrorism; and the inherent complexity, frequency and volatility of these events.

Within this current landscape, insurance clauses have become critical to businesses as their interpretation, definition and application as to specific ‘acts’, varies amongst insurance contracts (policies) and jurisdictions across the globe. In that context the speed with which world events can arise and enliven exclusions, has the ability to catch business unaware of gaps in cover and potentially leave them exposed.

Exclusions for acts of war, such as invasions, insurrections, revolutions, military coups and terrorism are common. As the definition of war and its application by policy products can vary across countries, caution must be had to the extent of coverage available to the policyholder.

Most commonly these exclusion may be found in the following policies that most businesses hold:
  1. Property / Industrial special risks

  2. Ocean marine cargo and hull

  3. Public and products liability

  4. Cyber insurance (see for example our article Threat of cyber-attack looms as Russia responds to sanctions)

  5. Trade credit
General impacts of Russia-Ukraine war on multinational business

The conflict is having major global impacts in terms of geopolitical risks, related insurance coverage, humanitarian concerns and actions taken by multinational businesses. Apart from businesses exiting or severing ties with Russia, significant economic, financial and trade concerns continue to exist.

These not only affect global inflation but also essential commodities such as oil, gas, grain and fertilizers. As for supply chains being adversely impacted, the cumulative result of this conflict is a fracturing and unstable geopolitical order.

The instability and uncertainty from this war has resulted in a number of major insurance and risk management issues for multinational businesses with exposures to those countries. It has resulted in a large number of businesses either leaving or reducing operations in Russia, whereby retaliatory action in terms of insolvency, proceedings and criminal liability have been threatened.

In addition, for those businesses choosing to retain even a reduced level of operation in Russia, there could be criticism in acting against Environmental, Social and Governance (ESG) policies which may impact on Directors and Officers (D&O) liability risks. Where a business exists in Russia and triggers a financial loss, D&O insurance coverage may also be impacted.

The conflict has drastically changed and continues to alter the global geopolitical landscape. As such, the following issues must be critically examined on an ongoing basis by businesses:
  1. Impact of sanctions and restrictions, both short and long term covering their number, type, modification and level of impact.

  2. Decisions to exit or curtail operating in potentially unstable or authoritarian region, where it may trigger derivative actions which may not be covered by insurance.

  3. New or altered exclusions being introduced by some insurers to reduce exposure to claims from the conflict and/or sanctions coverage alterations and unclear exclusions must be closely reviewed by the business to avoid risk exposures or potential disputes.

  4. Shift to ‘back up’ supply chains which may be in less known or established locations has further heightened credit and political risks. Insurance for these risks must be examined as to its adequacy and cost.

  5. In light of the current geopolitical climate costs of capital and the need for working capital are increasing. Credit, surety and political risk insurance can be effective in terms of additional liquidity and reducing collateral requirements. It also increases lending lines and reduces regulatory capital costs for financial institutions.
How companies with a global presence can protect their foreign assets and investments through non-insurance risk mitigation
Non-insurance-based strategies for companies to mitigate such exposures should begin by focusing on the connection between geopolitical and traditional business risk. In essence, these non-insurance risk mitigation strategies require action by business management involving the following:
  • Businesses with geopolitical exposures must enhance awareness and expertise particularly given their complex and dynamic inherent nature. This must be ongoing as these risks can change rapidly.

  • Be proactive in responding to trends and events. In this regard close collaboration is necessary with your risk advisors and insurers to reduce uncertainties within insurance coverage. Also, ongoing review of economic stability of the country in which your business is operating must be thorough, relying on internal company sources at the location, financial results and official Australian government announcements.

  • Management to formally adopt an ongoing enquiring nature to geopolitical risks and all changes to be immediately assessed against an up to date business risk profile.

  • Business risk profiles should be regularly updated as to risks being current, completely and properly defined, the ratings and effectiveness of identified mitigation strategies – these must be properly aligned to address controlling the risk.

  • Organisations must align internally to the geopolitical business environment to create risk mitigation strategies which are relevant to the operations, the specific exposures and be effective in mitigation action.
Existing business controls may need to be revised to ensure that they effectively address and manage the geopolitical risk. In this regard the following must be implemented:
  1. Improve staff training for risk management to cover the changing business environment and their skill level.

  2. Review and update policy procedures for operating, transacting business and controlling procedures within the current changing landscape.

  3. Examine the adequacy and timelines of both operational and financial reporting – consider if they are ‘fit for purpose’ to assist decision making within the current business environment.

  4. Review resilience plans and revise where they are deficient or obsolete, in this regard the following, must be updated:
    • Business continuity planning to mitigate risks from disruption, restrictions and other geopolitical events.
    • Crisis management planning and business continuity planning including emphasis on supply chain risk in terms of availability of other supply sources.
    • Business case submissions for commencing operations or extending operations in international locations to make provision for geopolitical risks and their consequences.
Insurance recommended to cover political risk, loss of income or damage

Political risk insurance is important for businesses with exposures in emerging markets or unstable authoritarian countries. Whilst coverage can depend on individual insurers and policies, most will offer cover for a number of specific events.

Political risk insurance is recommended for businesses with a multi-national footprint and can cover government expropriation or confiscation of business property and costs incurred due to government action including political violence, disruption and instability such as armed revolutions, insurrections, war or terrorism which stops business operations.

The current landscape with its highly volatile, complex and rapidly changing elements of risk, has created a tumultuous and challenging environment for multinational businesses with local and international exposures.

Further challenges are added to this when it comes to geopolitical risk insurance with exclusion clauses which vary amongst countries and insurers.

Navigating through the current geopolitical landscape requires caution. In all cases, exclusions must be clearly examined with insurers to confirm definition, interpretation and application. This has become imperative to avoid unexpected exposures, lengthy disputes and unforeseen costs.

For further information or advice relating to geopolitical risk please contact us via the form below.

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