Political risk losses surge in 2022

Nine out of ten respondents have suffered a political risk loss in the past year, according to analysis by WTW.

The scale of the loss frequency is in effect a paradigm shift, transforming political risk from a low frequency, high severity peril into “everyone’s risk,” according to How are global businesses managing today’s political risks a new report by the broker.

The 6th annual political risk survey produced by WTW, found that an unprecedented 92% of all responding companies experienced a political risk loss in 2022, up from 35% in 2020. Other findings include:

>    86% of Western European respondents reported a net negative financial impact from the conflict in Ukraine

>    33% of North American firms suffered a net negative financial impact

>    48% of respondents reported a direct political risk loss in one or more BRIC countries

>    100% of responding companies enhanced their political risk management capabilities since February 2022

>    68% now purchase political risk insurance, compared to 25% in 2019

>    Nearly 50% predict deglobalization will “greatly strengthen”

>    42% say decoupling from China will “greatly strengthen”

The ongoing conflict in Ukraine and resultant humanitarian consequences have had a business impact that one European respondent described as “devastating”. A US technology-company respondent said: “We have decided to end all our operations in Russia and Belarus. We suffered a loss of almost $1 billion.”

Whatever the financial impact, the shock of war on the European continent had triggered a “paradigm shift,” one respondent said. According to an executive in the automotive sector: “Business and politics have lived in two different realities. The events of the past year have now aligned realities.”

Looking to the year ahead, Ukraine heads the list of interview panel members’ top risks for 2023, followed closely by decoupling from China and crisis and new regulations in the EU.

“[Companies] were worried about the escalation of the conflict in Ukraine, but more worried about complications like sanctions and inflation,” said Sam Wilkin, director of Political Risk Analytics at WTW. 

“They’re worried that they could be arrested for facilitating avoidance of sanctions, for example, or that they could be pressured to renegotiate energy contracts next autumn. At the same time, they have more profound concerns about how globalized business models can be made to work in a politically divided world.” 

For instance, many companies struggled to imagine how the US-China economic relationship could be unwound without overwhelming damage to the world economy. Many companies are becoming nervous about continuing business there but are unsure about how to disconnect from such a major market. “Every day is China strategy day,” one European automotive sector specialist said.

The survey and interviews, conducted in January and February 2023 by Oxford Analytica, are based on responses received from 50 companies around the world, of which 50% have revenues in excess of $1 billion. 

Looking to the year ahead, Ukraine heads the list of interview panel members’ top risks for 2023, followed closely by decoupling from China and crisis and new regulations in the EU.

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