‘Rear View Mirror’ Political Risk Management No Longer Works: Marsh

September 30, 2013

In an age of social media, simply looking at what has happened in the past no longer works to forecast what political events lie ahead in emerging markets, insurance and risk management firm Marsh advises.

The speed at which political instability spreads is now “inextricably linked to social media, as disaffected populations globally increasingly turn to this powerful outlet to drive political demonstrations,” according to the latest Marsh Risk Management Research briefing, Social Media Heightens Political Risks in Emerging Markets.

This means that the “rear view mirror” approach to risk management, which multinationals frequently use to forecast risk by examining past events, is no longer sufficient when operating in at-risk countries, according to the report.

“Social media can exacerbate political risk by accelerating the formation of political protests, and enabling civil unrest to more easily and quickly transition from a single-country phenomenon to a regional event,” says Evan Freely, Global Credit and Political Risk Practice Leader for Marsh. “Conversely, authoritarian governments may use social media to deflect popular discontent away from political leadership and toward foreign entities.”

Freely says thus unrest can translate into a variety of political risks for businesses, including expropriatory actions, forced abandonment, forced divestiture, property damage, contract frustration, business interruption, and trade disruption.”

Instead of targeted and “just-in-time” political risk management, Marsh advocates a multi-country and multi-hazard approach to managing political risk. This includes the purchase of broad, multi-country political risk insurance policies and detailed planning to ensure business continuity and the safety of employees and key assets.

In its report, Marsh suggests that organizations doing business in countries with high levels of political risk should:

  • Review their business interruption and supply chain resiliency plans, evaluate the impact of potential political risk events on their own operations and on those of their customers and suppliers.
  • Ensure that they can communicate potential problems to employees, customers, and suppliers, and review crisis communication plans to ensure the safety of employees.
  • Review their credit risks and credit control policies and procedures. Ongoing financial monitoring can identify strengths and weaknesses in their credit risk management processes, enabling firms to avoid bad debts and improve cash flow.

“The proliferation of social media will likely accelerate in the years to come, at times facilitating protest movements, including in some countries traditionally deemed ‘safe,'” says Freely. “It is vital that businesses recognize the added risks that social media can present and manage those risks accordingly.”

Source: Marsh

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