Is Political Instability on the Rise?

There are 33 countries in the world categorised as ‘high-risk’ by the insurance industry. Of those, 75% have seen an increase in Political Risk rating over the last three years. What’s going on – and why does it matter?

Bellwood Prestbury provides Trade and Political Risk insurance to companies trading, operating and investing in countries that are generally deemed to be less stable than stronger economies. This enables clients to finance overseas projects, set up businesses or enter into import and export arrangements with confidence. They know that if political change or violence threatens their operations or investments, insurance will cover legitimate losses.

Whilst premiums for this kind of cover depend on the specific nature of each business, they are also influenced by the level of perceived risk in each territory, which is given a Political Risk rating. Updating this information for the Bellwood Prestbury website showed that Political Risk ratings have increased in more than three quarters of high-risk countries over the last three years.

What’s going on?

Rupert Cutler, Risk Consultant at Bellwood Prestbury, says that Political Risk ratings are based on political uncertainty in the country in question and the possibility of default on payments. Rupert explains: “Political uncertainty or change in regime can prevent you from trading (think of the dramatic overnight change in Afghanistan a few years ago), restrict your physical ability to trade (perhaps a vital airport or sea port is closed) or change the regulatory situation, making it impossible to get goods and/or funds in or out."

“This impact is being felt more severely in less developed economies...“

War in Sudan, coups in Burkina Faso, Mali and Niger and continuing unrest and political violence in Pakistan, Ukraine, Yemen, Libya… all of these directly affect business operations. This can also have a knock-on effect across regions, with political migration, uprising and instability spreading to neighbouring countries or affecting economic stability.

“Another factor is how likely are you to get paid?" Rupert says. "In the UK (as elsewhere), we’re all aware that we’re battling a cost of living crisis. One of the reasons for this is the geo-political landscape, with the slowing down of world trade caused by the impact of Covid, exacerbated further by the war in Ukraine. This impact is being felt more severely in less developed economies too, but they have even less of an economic safety net. This has resulted in macro-economic failures. For example, Argentina is in full-time economic crises, Ghana has defaulted on its debt payments and Zambia has been forced to renegotiate its debt structure, which creates a less stable environment for trade at a business level. It may also result in the cancellation of major government-funded infrastructure projects. If you are providing construction, telecoms or consulting services, you could be heavily invested in a project that suddenly ends without compensation."

Rupert continues: “The global cost of living crisis also means that the cost of commodities has gone up. This may well affect your business model. Availability of local stock, or the rising cost of local employment could collapse your supply chain or leave you holding perishable stock you can’t profitably trade. All of these factors, combined with claims data from each region, is why Political Risk ratings are on the rise.”

Why does it matter?

Rob Thompson, Director at Bellwood Prestbury, says that the implication of increased Political Risk ratings has a dual effect.

Rob explains: “Ratings are going up because there are higher perceived risks in doing business in particular places. We often find that companies who might not have previously sought insurance for their international commercial arrangements become aware of the vulnerabilities and seek out Trade and Political Risk insurance for the first time.

"In some cases, their financiers insist on it as a condition for investing. For us, that means more enquiries across the board, and often a concentration of new arrangements in countries where political or economic instability suddenly arises.

"If a risk rating goes up it also means that the cost of cover for that risk will be higher. We work across global markets to get the best rates for our clients so we can often mitigate that increase, but many clients will see increased premiums.”

What’s the global outlook?

In its 2023 analysis, the Global Risks Perception Survey (GRPS) from the World Economic Forum (WEF) brings together leading insights on the evolving global risks landscape from over 1,200 experts across academia, business, government, the international community and civil society.

Asked to rank global risks by severity over the next two years, the cost of living crisis was ranked at number one and natural disaster and extreme weather events at number two. Geo-political confrontation was ranked at number three.

Asked to rank the same risk categories over a ten-year horizon, the picture changes radically, with geo-political risk at number nine. The first four categories are related to environmental risks such as failure to mitigate climate change and extreme weather events, with the number five position being large-scale involuntary migration.

Rupert Cutler agrees with this outlook, but says all of these risks will continue to have an impact on trade uncertainties. “If climate change is causing extreme weather events or making it difficult to live and work in a particular country, that will further destabilise social structures and local economies. A layer of protection underlying trade and commerce becomes ever more important. Well-structured Trade and Political Risk insurance can protect clients from these kinds of risks, giving them confidence to build an international business in an uncertain world.”

Visit our High-risk insurance country index to learn more about each territory.