New Analysis Reveals Political Risk Exposures around the World: Willis

January 29, 2015

Willis Group Holdings has published a new analysis from Oxford Analytica in the form of the “VAPOR Political Risk Model,” which, it said, “helps companies assess the financial exposure to a suite of political risks for the first time.

As an example: “Investors in Ukraine can expect to lose $34 in every $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.

It also indicated that “companies can expect to lose $20 in every $100 invested in Venezuela over a ten year horizon as a result of political risks arising from oil price volatility, political upheaval and the possibility of a sovereign default. Over the same period the expected loss in the United States and United Kingdom, relatively low-risk jurisdictions in comparison, is $1 in every $100.

“Turning to Asia, investors in Bangladesh can expect a loss of $8 for every $100 invested over ten years. Given the threat of government intervention the estimated loss over the same period in China rises to $9 in every $100. In Russia the figure is $30 in every $100 as a result of sanctions and heated trade tensions – making it the riskiest of all the major emerging economies.

These conclusions were revealed by a new political risk model, called VAPOR (Value at Political Risk), launched by Willis and Oxford Analytica. Willis said 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. Initially, VAPOR covers six different political risk perils, across 11 different industry types in 100 countries.

“North Korea is the riskiest investment destination currently rated by VAPOR. Companies investing there can expect an estimated political risk loss of $40 in every $100 invested over a ten year period.”

Political risks cover a lot of territory. They are essentially “the threats posed to businesses by political upheavals or social change. Common examples include expropriation, political violence and the imposition of trade sanctions. They are inherently unpredictable – arising, as they do, from complex, dynamic human societies – and they often have catastrophic consequences.”

As a result the “identification and management of these risks in a volatile political and economic climate throughout the world represents a significant and increasingly pressing challenge for the boards of global companies.”

Paul Davidson, CEO of Willis Financial Solutions, commented: “VAPOR offers a potential solution to the challenge of putting dollar values on political risk – for the first time.” 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.

“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.”

Sam Wilkin, Senior Advisor, Political Risk at Oxford Analytica, added: “Inspired by the catastrophe modelling industry, 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. This gives businesses the ability to evaluate the costs of geopolitical risks when deciding which industry and country to invest in.”

Founded in 1975, Oxford Analytica is an international consulting firm based in Oxford which provides business and political leaders with timely analysis of worldwide political, economic and social developments. The firm “aims to support multinational businesses, international organizations and governments in understanding the complex forces affecting them, managing their risks and taking informed decisions.”

Source: Willis Group Holdings plc

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