How to integrate political risk analysis into enterprise risk management

According to Marsh’s latest Political Risk Report , the global geopolitical and economic environment continues to remain uncertain. It has become evident that political risk considerations should not be viewed in silos but integrated into the organisation’s enterprise risk management (ERM) framework. By gaining a thorough understanding and appreciation of the impacts of political risks, organisations stand to better navigate today’s complex and interconnected business environment.

Before integrating political risk analysis into the ERM framework, it is crucial for the organisation to comprehend the potential drivers and exposures to political risks to ensure that resources are appropriately dedicated to areas requiring the greatest executive attention.

5 steps to effectively integrate political risk analysis into enterprise risk management frameworks

1. Define risk appetite and tolerance

A well-defined risk appetite will provide organisations with insights on the risk exposures that they are willing to take to achieve their strategic objectives. Leaders must ask themselves fundamental questions about their organisation’s willingness to accept political risk.

These questions may include:

What are the potential benefits of engaging in politically sensitive markets?
What is the maximum loss that your business is willing to bear should political risks materialise?
What is the maximum percentage of portfolio that should be located in areas with high political risk? Where are the “no-go” zones?

Risk appetite statements and tolerance thresholds will provide clarity on the acceptable level of risk when considering opportunities in markets with higher political risk. This approach will allow organisations to make a risk-informed decision when comparing the opportunities in politically sensitive markets while being cognisant of the risks exposures they may be exposed to.

2. Consider risk interconnectivity

The latest Marsh-World Economic Forum Global Risks Report used the term ‘polycrisis’ to describe the state of today’s risk environment, which highlights the extent to which risks have become interconnected, and how the overall impact of such risks may exceed the sum of each part.

Political risks are often a driver or outcome of other risks that are managed as part of an organisation’s ERM framework. Organisations must connect the dots and perform a risk interconnectivity exercise to identify the various linkages between key risks. Organisations should seek to understand the potential chain reactions, systemic risks, and hidden vulnerabilities that may be present. This will provide the management with a holistic view of how political risk acts as a trigger or consequence to other risks in the risk profile.

3. Perform a risk sensitivity analysis to evaluate and quantify political risk exposure

Sensitivity analysis involves modelling different scenarios and assessing their potential impact on your organisation’s operations and financial performance. This can be done through a variety of techniques, including financial modelling, scenario planning, and risk mapping.

In the context of political risk, sensitivity analysis might involve modelling the potential impact of some of the events, such as changes to government policies, civil unrest, or controversial political ideology. The potential impacts on an organisation will range from business interruption, supply chain disruption, workforce unavailability, and protests or boycotts by customers.

By modelling different scenarios and assessing their potential impact, companies can better understand the risks associated with operating in a particular environment and develop strategies to manage those risks.

4. Choosing the right strategy to manage your political risk

By comparing the result of your sensitivity analysis, risk appetite and tolerance, as well as risk interconnectivity, organisations can make informed decisions about how best to manage and mitigate political risk and protect long-term business sustainability. This may include:

Developing business contingency or crisis management plans to respond to different scenarios.
Diversifying operations and suppliers across different regions to reduce exposure to risks.
Investing in risk transfer solutions, such as reviewing your existing insurance program to improve your protection or purchasing a standalone political risk insurance product.

5. Monitoring political risk trends as part of your BAU (business-as-usual)

It is important to note that political risk management should be integrated into your broader ERM framework, which includes political risk analysis that identifies and assesses what risks could impact the organisation's objectives, as well as the extent of the impacts.

As political risks can be highly unpredictable and change rapidly, integrating political risk management into ERM empowers organisations to better anticipate and prepare for potential risks, minimizing their impact on the organisation's operations and financial performance.

Reinforce your enterprise risk management with Marsh

As the world’s leading risk advisor and insurance broker, Marsh recognises that a sound ERM framework is especially critical in countries or industries where underwriting capacity could be limited. Working with a trusted partner to prepare for political or other enterprise risks is crucial to improving your insurability and protecting your bottom line. Speak to us to validate your risk framework and mechanisms to enhance the risk resiliency of your organisation.