BUSINESS INSURANCE and COMMERCIAL RISK ON-LINE both recently reported on political risk and the threats political risk can pose to businesses. BUSINESS INSURANCE noted that:
Political violence risks are increasing due to geopolitical tensions, a weakening of liberal democratic governance, and the widespread effects of chronic conflicts around the globe.
The number of terrorist attacks in Western countries totaled 204 in 2017, roughly double that 96 in 2016, but the total number of casualties in both years was broadly the same.
COMMERCIAL RISK ON-LINE noted that a “Survey of 300 CIOs and CFOs revealed…Political events topped the list of macroeconomic concerns in 2017.”
Not only is political risk real and a cause for concern among executives of large corporations, but it can be a game ender for small and mid-size companies.
Fortuitous political events can cause massive price variations (think tariffs), supply chain interruption (think embargo) and business interruption. Also, changes in laws and regulations can significantly hurt and even destroy entire market segments. As an example, ObamaCare put some companies out of business while others prospered.
And, this raises a key question: How should businesses best prepare for political risk?
Political risk can certainly be mitigated through diversification of products, customers and suppliers. However, this can be a tall order for many small and mid-market companies. Another way to prepare for political risk is to insure for it. However, commercial insurance for political risk is often non-existent, difficult to obtain, riddled with policy exclusions or cost-prohibitive.
But, there is a better way. A business can own its own insurance company – known as a captive insurance company – and insure against political risk. This is a powerful approach for businesses to build tax-favored loss reserves for the unexpected. Furthermore, captive insurance policies often have far fewer exclusions than commercial policies, making them far more comprehensive for the complexities of political risk. Finally, if political risks don’t materialize, the business retains the insurance premiums paid as profits in its captive insurance company.