Political risk can originate from national transnational or civil society players. In the past decade, political risk has increased across every level.
- Transnational/geopolitical risks rise when countries’ interests in the defined policy terms collide. In the last decade, the trade & investment barriers have increased by 257%, which has given rise to global conflicts.
- National risks occur due to government or economic instability, which impacts the domestic businesses and market. At the national level, democratic sentimentality is increasing as the year’s pass.
- Societal risk arises when groups associated with consumer bodies and trade unions launch protests or boycotts. It impacts global businesses and markets. Sentiment analysis reveals that negativity towards foreign companies is increasingly contributing to the policy improbability environment.
How the political risk impacts business performance?
Political risk represents multiple interconnected problems that materially affect a business in many ways. The significant impact political risk can have is in areas including –
- Reduction in sales
- Disruption in production & operations
- Increase in research & development cost due to transferring intellectual capital forcefully
- Significant security threats can deter foreign direct investment
- High capital cost because creditors & investors perceive corporations experiencing political risks as risky
- Increases the regulation compliance cost
- Experiences governance challenges which lessens accountability and transparency
- Loss of social license due to political reactions
Political risk is substantial cross-enterprise unavoidable threats, which need a holistic approach to protect their reputation and enhance growth opportunities. A company can alter the negative sales impact through strategic sourcing and regulation impact via domestic recruitment.
Corruption threat can be mitigated with different regulatory strategies, while the financial impact due to adverse political happening can be mitigated with political risk insurance policy. Niche Trade Credit brokers are experienced in protecting Australian businesses from political violence, asset seizure, and more risks.
Political risk coverage is designed to reduce the commercial asset, property, or income loss due to political events. Political risks are impossible to predict at times and the income and asset loss can be catastrophic. Emerging markets offer MNCs great opportunities to develop and obtain a dominant market share.
Nevertheless, they even have in-built risks greater than developed markets. Socioeconomic events, foreign government actions, and political turbulence can cause the destruction, confiscation, or decline of asset value. Without political risk, coverage businesses may find it hard to leverage the developing markets.
Political risk coverage areas are –
- Nationalization, expropriation, and confiscation
- Forced divestiture
- Forced abandonment
- Selective discrimination
- License revocation or cancellation
- Business interruption
- Breach concession
- Political violence
- War & terrorism
- Export embargo
- Currency inconvertibility
The political risk protection differs from one insurance provider to another. Before you have to make claims, get familiar with the policy terms. The exact coverage depends on the kind of policy you purchased. For example, the policy may protect your losses against a terrorist attack on your oil rig but not when there is political unrest that caused the decline of oil prices in the market. So, have a good understanding of your political risk protection policy.