Insurer Zurich and international affairs think tank, Atlantic Council, have cooperated to study three potential major geopolitical scenarios that could shake the global economy; ensuring risk management professionals and governments remain one step ahead of the mitigation and response game.
With a changing geopolitical sphere being a hallmark of recent years, for re/insurers and governments operating in an increasingly competitive world, anticipating which way the tide may turn and devising timely back-up plans could mean the difference between sink or swim.
The research team quantified aggregated global risks from three scenarios with the most potential to interrupt business and risk underwriting and policies; protectionism, the energy crisis from Middle Eastern conflict, and domestic instability caused by water and food shortages – using the University of Denver’s Pardee Center for International Futures quantitative model.
Zurich said while organisations “cannot control today’s geopolitical risk landscape, they can work to build resilience by understanding how these risks impact their strategy and operations.”
The report advises public and private risk professionals adopt a proactive approach to consider which back-up plans and policies would best cushion against these risk scenarios and contribute to global stability.
Bryan Salvatore, Head of Specialty Products for Zurich North America, cautioned that current geopolitical uncertainty can create a “volatile business environment for companies connected to global markets, whether it is as a multinational corporation with overseas manufacturing and retail facilities or a regional operation with global suppliers.
“This report makes clear the consequences of allowing geopolitical risks to fester, but it also offers insights on how we might weather the storm,” he said.
David Anderson, Head of Credit & Political Risk at Zurich North America, emphasized that understanding the connections between different kinds of risks is vital to managing them and avoiding surprises.
“Those risks are, by their nature, difficult to shape, because they are driven by forces beyond the control of companies or single governments. Nevertheless, in view of the growing geopolitical volatility, companies need to examine the disruptions that could be mitigated,” he said.
The report highlighted that with growing political protectionism, firms need to evaluate potential disruption to their global value chain, and develop business continuity plans with options for restructuring with substitute suppliers and manufacturing sites – as governments are likely to quickly retaliate against any imposed trade restrictions; “it is very important for companies with critical supply chains that they understand their exposures to geopolitical actions. Scenario planning will be a key tool to assess these risks.”
For global business players purchasing new manufacturing technologies such as 3D printing could lesson dependence on manufacturing regions – and supply chain and political risk insurance (PRI) would provide cover against import and export embargoes or license cancellations which might be imposed in a trade war or for other reasons.
Governments are also advised to “examine the impacts on national security from cutoffs supply chain disruptions or increased costs of imports” and develop contingency plans.
The risk of large-scale conflict in the Middle East— the world’s most oil heavy region— has been steadily increasing in recent years, according to the report, tensions are driven by growing enmity between Saudi Arabia and its Gulf partners against Iran.
“Even a partial disruption of production facilities in an area such as the country’s Eastern Province would have an immediate impact on oil supplies and prices, with knock-on effects for the global economy,” said Zurich.
Once again, for global players, risk mitigation is about contingency plans and looking for supply chain alternatives; “what other energy resources elsewhere would be available to defray the Middle East losses? And, given the growth of renewables in the world, what role could renewables play in replacing the lost fossil-fuel production coming out of the Middle East?”
Current and future company investors, looking to invest in markets in regions highly dependent on outside energy supplies such as Asia, which is especially vulnerable to energy disruptions, are advised to “take into consideration possible energy disruptions as well as other political risks.”
And the final geopolitical scenario examined – is perhaps the most far-reaching and inevitable – instability due to water and food scarcity.
Water scarcity is already deemed a major risk and the problem is set to compound with climate change and population growth; “Driven by increasing populations and middle-class incomes, water scarcity is already—and will continue to be—a major global geopolitical risk. The International Organization for Migration (IOM) estimates there are now several million “environmental migrants,” and that this “number will rise to tens of millions within the next 20 years, or hundreds of millions within the next 50 years.”
Globally by 2035, water scarcity is set to become increasingly severe, and global-level scarcity is predicted for after 2050; water shortages have great potential to not only disrupt one the world’s most important industries – agriculture – but increase risk of conflict.
“With the increasing frequency of extreme weather events, future food production is at higher risk, increasing the potential for bigger food price spikes than in 2008, and putting pressure on countries lacking the ability to cope. Of the major grain groups (wheat, maize, rice, soya bean), 30 percent or more of each grain’s production occurs in regions experiencing extreme water stress.”
The Zurich and Atlantic Council report suggests companies consider implementing a water-management and conservation plan to minimize water use and develop sustainable solutions, collaborating where possible, with government schemes.
Increasingly, in a starkly interconnected world, re/insurers must adopt a holistic and collaborative approach to risk, looking at the broader global picture instead of individual risks, and proactively assessing and mitigating against these with strong public and private sector ecosystems and distribution channels.
For re/insurers, an emphasis on collaboration could mean reaching out to governments facing similar tasks in risk assessment and mitigation and sharing risk data and assessment models.
Anticipating and preparing for future risks means keeping abreast of geopolitical developments and adapting policies and underwriting accordingly, as well as ensuring clients and customers have sufficient back-up plans in place to deal with business disruption.
A holistic approach to geopolitical risk management offers reinsurers opportunities, not only to expand and protect profitability with comprehensive risk assessment, but to contribute to global economic and political stability.
