Growing pressure from geopolitical risk is changing the way business operates. Attacks on ships in the Red Sea are forcing vessels to take the much longer, more expensive route around South Africa. The war in Ukraine spurred many companies to abandon operations in Russia. State-sponsored cybercriminals are hitting close to home with attacks that are more targeted, more disruptive, and more ingenious than ever. And volatile relations in the many parts of the world are adding another layer of uncertainty to the mix.
All it takes is a single event or shift in policy to trigger a cascade of impacts that can quickly spread through a complex web of interrelated risks and relationships with far-reaching consequences. Supply chains, third parties, people, finances, operations, and reputation can all be touched as an event reverberates across the business and the global economy.
Be Proactive
While the initial event may be well beyond your control, there are proactive measures you can take to help protect your organization from geopolitical risk. Here are three techniques to consider.
Scenario Mapping
Scenario mapping is an exercise that identifies your most pressing external risks and maps them to specific variables. It considers factors like the time, resources, and personnel required to continue operations under different scenarios. You’ll come away with a concrete plan on how you will address each identified external risk.
This technique works best when stakeholders from different departments participate in identifying events. Broad involvement also helps raise awareness of the internal impacts of outside forces, which can enhance your overall resilience when faced with unpredictable events.
Business Playscript
A business playscript is a technique that helps organizations understand the motives and actions of connected entities to better integrate geopolitical risk considerations into decision-making. It uses a narrative framework to describe the logic, storylines, decisions, and motives of all the members of a business’s ecosystem.
The technique is frequently used to identify the dynamics and motivations that lead to geopolitical risk and other risk events, so organizations can mitigate potential threats and capitalize on emerging opportunities.
Risk Transfer
Transferring the risk to a third party – typically insurance – is a tried-and-true risk management technique that is useful in minimizing the financial fallout from geopolitical risk.
Political risk insurance can provide a safety net that protects the business from political instability and the impact on operations and finances. It allows companies that operate in emerging or unstable economies and those that rely on imports, exports, and foreign currency to make decisions with greater confidence. This type of insurance often covers losses related to:
- Politically motivated violence like war, insurrection, strikes, riots, and terrorism that cause damage to assets, operations, and income
- Government action that results in losses like asset or operations confiscation, cancellation of import/export permits, or business interruption from boycotts, sanctions, etc.
- Restrictions on currency conversion
- A breach of contract by a government
- Credit risk
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- Russia-Ukraine tensions
- Cyberattacks
- U.S.-China strategic competition
- Deglobalization
- Climate risk
- Energy security
- Pandemic fallout/future pandemics.
Note that these issues are generally excluded from traditional commercial insurance policies. The specific events covered by political risk insurance can depend on where the policyholder does business, the adverse conditions that might come into play, and the current political climate. Each policy will differ in the details, and it is important to understand exactly what events are covered to avoid surprises.
Geopolitical risk is a growing force in an increasingly complex global environment. And it is becoming even more volatile as governments pursue economic policies that intensify trade disruption and distortion. While the events themselves may be out of your control, you can prepare for disruption, plan your response, and protect your assets and finances by using a few targeted techniques. With rising tensions and turmoil around the globe, don’t wait for today’s instability to solidify into a full-blown crisis.
For more on navigating geopolitical risk and other uncontrollable risks, download our white paper, The Hunt for Hidden Risks, and check out Riskonnect’s Business Continuity & Resilience software solution.
