Analysts at global advisory, broking, and solutions company WTW have noted a “sea change” in how companies perceive political risk following the outbreak of war in Ukraine last year, as well as issues such as rising economic nationalism and growing tensions between the West and China.
WTW’s 2023 Political Risk Survey found that more than 9 in 10 of the companies it surveyed reported a political risk loss last year, up from 35% only a few years ago.
In particular, the escalating conflict in Ukraine, on top of its humanitarian impacts, had a “devastating” business impact, according to a European member of the panel of business executives interviewed by WTW.
Additionally, all of the companies surveyed by WTW said they had made at least some enhancement to their political risk management capabilities since February 2022.
Notably, the proportion who reported purchasing political risk insurance nearly trebled from 25% in 2019 to 68% this year.
Following the escalation of conflict in Ukraine, “we find ourselves in a new investment climate,” said an interview panel member from the oil and gas sector, “and are trying to come to terms with this shift.” But what, exactly, does this new climate look like?
“This year, political risk became everyone’s risk,” commented Sam Wilkin, Director of Political Risk Analytics at WTW.
That said, WTW found a differentiated impact across world regions, with 86% of Western European respondents reporting a net negative financial impact of the conflict, while only 33% of North American firms did so.
In further findings, respondents to this year’s edition of the survey were far more likely to select the worst-case outcome across geopolitical trends, WTW reported.
For instance, the proportion who predicted deglobalization would “greatly strengthen” was 16% last year, whereas this year it was nearly 50%. Similarly, the proportion who predicted decoupling from China would “greatly strengthen” was 12% in 2022, but 42% in 2023.
Companies also reported that such geopolitical divides were being mirrored in their internal operations, with one panellist noting that global decoupling is being reflected in “everything”, including HR systems and production systems.
Looking ahead, panellists flagged complications from the war in Ukraine as the top political risk for the year ahead, followed by decoupling with China.
Third place was taken by the European Union, which faces an energy crisis, but is also reshaping the rules and standards of global businesses with its willingness to regulate in areas such as technology, data, supply chains and climate.
“Some panel members claimed the change had been evident for years … But it is undeniable that the tragedies of 2022 produced a further shift,” WTW’s report concluded.
“For the brokers at WTW, the world changed as well. Until this last year, the primary challenge was helping clients understand the political risks they faced. By the summer of 2022, the risks were well-understood and the challenge was convincing carriers to write cover,” it continued.
“In 2023, globalized companies will face the further challenge of taking the hard decisions necessary to adapt to new realities – without losing hope that the world might recapture some of the cooperative spirit that enabled such tremendous gains in human prosperity in recent decades.”
