World leaders — and the rest of the world — saw the uprising and tensions explode with recent protests against world leaders at the G20 Summit in July.

Protectionism, even without the countless demonstrations and marches that have sprung up against it, is a breeding ground for political risk and disruption. The protests against protectionism and populism are evidence that these phenomena are as alive as ever.

U.S. trade and economic policies are in a state of flux, shifting to a more protectionist agenda, and the risk management community is acutely focused on what that means for their businesses. As we've seen, this is not just an American phenomenon. U.S. risk managers that operate globally need to carefully look beyond our borders to see not only how other countries are reacting to our policies, but to their movements toward protectionist agendas as well.

|

Death of globalism

In a sweeping backlash to globalism, the “our country first” movement is focused on keeping jobs and investment within borders. There is no longer a blind acceptance of globalism. As we see with Brexit, the UK's vote to leave the EU was a nationalist action, reflecting a need for economic, foreign and domestic policy control. We are seeing movements like this in Germany and France where parties are pushing for restrictions on immigration and for jobs to stay within their countries. A poll from IPSOS conducted last year shows that Italy, France and Sweden have nearly half of their populations ready for an “exit.”

Though one could look at the state of Europe and see major losses for populism and nationalism with the defeats of Marine Le Pen in France and Geert Wilders in the Netherlands, the anti-globalism strain is still pervasive in Europe. In recent years, there is a growing perception that globalism is synonymous with neglect for one's own country and these sentiments are fueling the strength of populist and protectionist messages.

|

Tensions heightened

Even though populism has been sweeping across Europe as it has in the U.S., tensions have only heightened between the U.S. and its major allies in Europe. Following the most recent G7 Summit in Italy, German Chancellor Angela Merkel said: “the times when we could fully rely on others are to some extent over,” showing increased wariness and movement toward protectionism.

The G20 Summit has fared differently from the G7 Summit but not any further from the themes of uncertainty and risk. The clashes between police and protesters are just one example of the types of risks involved in such a politically turbulent atmosphere.

All of these actions create uncertainty which makes global trade less predictable and riskier. In this heightened global state of frustration, people are feeling disaffected and are committing acts of violence to let their leadership know. Risks of political violence and retaliation are on the rise. At the same time, we are also seeing a significant uptick in terrorist attacks in major cities and public spaces.

The risks from increasingly nationalist policies and our very own “America-first” strategies are taking various forms. (Photo: Shutterstock)

|

On the radar

Clearly, the vast theme of disruption and uncertainty is putting established nations and the enterprises located in these nations on the radar for political risk insurance considerations. At the same time, the risky countries we've watched for the past few years — such as Mexico, Venezuela and various Middle Eastern countries — are still risky and we expect further turmoil in those regions. The result is a new imbalance and weakening of the global supply chain that will create challenges for companies that trade and operate in various parts of the world.

According to Dun & Bradstreet's Chartered Institute of Procurement & Supply (CIPS) Risk Index, the “Global supply chain risk grew to a record high at the end of 2016 as the CIPS Risk Index, powered by Dun & Bradstreet, rose to 82.64, from 79.14 at the end of 2015. The figures put global supply chain risk at the highest level in 24 years following a year in which the pace of globalization appeared to slow.”

The risks from increasingly nationalist policies and our very own “America-first” strategies are taking various forms. Here are the top three risks to watch:

|

1. Governmental action and intervention

With new regimes or changes in foreign relations, expect to see governments retaliate by not honoring agreements or obligations with foreign companies doing business in their country. They might deliberately cancel a contract, create additional competition or pass laws to restrict foreign businesses.

|

2. Changing trade agreements/structures

The trade agreements businesses relied on, such as NAFTA or the Trans-Pacific Partnership (TPP), will either be revised or nullified. President Trump has agreed to pursue renegotiation of NAFTA despite termination still being on the table, and he has already withdrawn from the TPP. This will be magnified over the next year with threats and actions to close borders. The insurance industry and risk managers should not only be looking to US trade agreements, but also to trade agreements between other countries that might create disruption for US trade.

|

3. Economic sanctions

Government actions to impede trade with another country is an ongoing risk. An increase in sanctions will slow the movement of goods and also result in non-payment. If a party is not able to export, bills will not be paid.

Those who have worked in the political risk insurance market for multiple decades know turmoil is cyclical and not concentrated in just one region. Business continuity risks can be managed, but companies must take an active role. It starts with conducting regular assessments of risks along the supply chain. A strong crisis management program will include staying up to date on where a company operates, understanding contractual obligations and being aware of political risks.

Through these steps, the risk management process should identify weaknesses and risks facing critical assets, and develop contingency plans for likely outcome scenarios. Be a demanding insurance buyer and find tailored insurance and risk management solutions to address your risk profile.

Todd Germano is executive vice president of Allied World's global crisis management division. Germano joined Allied World in 2008 and previously worked for AIG for 11 years. He is a graduate of Fordham University and the University of Connecticut. Germano can be reached at [email protected].

Want to continue reading?
Become a Free PropertyCasualty360 Digital Reader

Your access to unlimited PropertyCasualty360 content isn’t changing.
Once you are an ALM digital member, you’ll receive:

  • Breaking insurance news and analysis, on-site and via our newsletters and custom alerts
  • Weekly Insurance Speak podcast featuring exclusive interviews with industry leaders
  • Educational webcasts, white papers, and ebooks from industry thought leaders
  • Critical converage of the employee benefits and financial advisory markets on our other ALM sites, BenefitsPRO and ThinkAdvisor
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.