Rising tensions

As the year draws to a close, Marc Jones examines the political risk horizon and finds unrest in a number of countries only tilted towards further deterioration

The political risk situation over the course of 2014 was as terrifyingly unpredictable as it was sadly predictable. The rise of ISIS seems to have taken many by surprise – however, most outside insurers and brokers currently do little if any business in Syria and Iraq to the ongoing unrest in both countries. Russian interference in the Ukraine has been speculated upon in the past, so recent events might not have come as a total surprise to some, given past Russian interventions in Chechnya and Georgia.

This year has also brought new entrants to the market, which, as Claire Simpson, political risk underwriter at Hiscox, told us has increased competition and only reinforced the need to maintain underwriting discipline. “The year has also brought sanctions and regional instability,” Simpson explains, “specifically within Russia and the Ukraine, so staying alert to international regulation and continued issues in the Middle East and Africa is vital if we are to remain competitive in this line of business.

“Commodity prices are another important issue. Falling oil prices, for example, create winners and losers. For oil exporting countries, a sustained low oil price can leave them detrimentally impacted by weakened currency, unable to balance their books and in some cases even reduce access to international markets. We have seen this already in Russia.”

Russia is also on Aon’s radar. According to its latest annual political risk map, economic or political events caused an increased risk rating for all five emerging market BRICS countries (Brazil, Russia, India, China and South Africa). In its report, Aon highlighted a number of other noteworthy changes, including lowered risk ratings for some countries; Ghana, Haiti, Laos, Philippines, Suriname and Uganda all saw their risk ratings lowered due to improvements in their positions over the past year.

Aon’s analysis highlights a number of reasons for Russia’s increased risk level, highlighting recent events in Eastern Europe where the Ukraine has been roiled by internal divisions and open fighting in places as Russia seeks to intervene. As the report reads: “Political risk remains very elevated in the countries affected by the conflict in Ukraine. We have previously highlighted the increase in political risk in Russia, Ukraine and Moldova, especially political violence, political interference and exchange transfer risk, and believe the risks are tilted towards further deterioration, particularly in Russia.”

Marsh concurs – and in its own report on this in March of this year the broker noted that concern over the political unrest and country credit rating in Ukraine and potential sanctions against Russia had caused some insurers to effectively stop underwriting political risk policies in those two countries. “Current policyholders with exposure in those countries may experience premium rate increases upon policy renewals. Companies looking to conduct new business in Russia may encounter difficulties obtaining coverage; insurers have effectively stopped offering coverage for any new credit or political risk exposures in Ukraine,” reads the report.

More recent events have seen the situation in the Ukraine continue to deteriorate, especially after Russian ‘volunteers’ intervened in the East of the country. The shooting down of Malaysian Airlines Flight 17 over the area in July led to truce talks and an eventual ceasefire. However, as this issue goes to press there were new reports of more Russian forces entering Eastern Ukraine again, possibly heralding a new phase of unrest in the country.

As for the other BRICS countries, Aon had downgraded Brazil because political risks have been increasing from moderate levels as economic weakness has increased the role of the government in the economy. According to the report, India’s rating was downgraded with legal and regulatory risks elevated by ongoing corruption and moderately high levels of political interference: “Territorial disputes, terrorism, and regional and ethnic conflicts also contribute to elevated risks of political violence.

China’s rating was downgraded to moderately high. This deterioration in political risk, including an increase in political violence, has occurred at a time of slowing economic growth, which suggests that the economic policy deadlock and economic sluggishness are mutually reinforcing. South Africa’s rating was downgraded; despite having strong political institutions, South Africa is struggling from recurrent strikes, which have become the major means of wage setting, and which weaken the outlook for business and raise financing costs,” the report explains.

The Middle East

Any analysis of current political risks has to acknowledge the impact that the rise of ISIS has had on the Middle East. The ongoing Syrian civil war seems to show little sign of ending and has been further complicated – and embittered – by the rise of the group.

Broker Guy Carpenter is certainly concerned about the recent unrest in the region. Its latest report on terrorism risk, Uncertain Future: Evolving Terrorism Risk, comments on the spill over of violence from Syria to other Middle Eastern countries is a clear risk in 2014 and beyond. The conflict, and the sectarian tensions that underpin it, it believes, could destabilise a number of countries that share borders with Syria and be a catalyst for further violence in countries such as Lebanon, Iraq, Turkey and Jordan. As the report reads, “ISIS has already exploited conditions in Syria to its advantage in Iraq, where the level of violence is at its highest for a number of years. The group has also made significant territorial gains in Iraq recently, advancing its aim of creating a caliphate in parts of Syria and Iraq.”

JLT has also focused on the potential regional impact of ISIS. Its November Risk Outlook report specifically highlights the recent destabilising of Lebanon as a direct result of the fighting in Syria. Large numbers of refugees fleeing the fighting have arrived in Northern Lebanon – along with ISIS fighters looking to continue the spread of the group throughout the region. That said, although JLT highlights concerns about the long-term stability of the country, it does not expect Lebanon to fall back into civil war, stating that: “In spite of this [unrest], an expansion of the violence into a full-blown civil war is not something that many would forecast. This is principally because the Lebanese mainstream political parties strongly oppose a civil war and will go a long way to prevent it.”

Maintaining focus

ISIS is now being battled by a disparate – and extremely loose – coalition of forces, ranging from the Syrian and Iraqi governments, US and British warplanes, Kurdish forces in Syria and Iraq and also Syrian rebels. It remains to be seen what will happen there.

Ironically the rise of ISIS has helped to obscure what used to be the most notorious global terrorist group and political risk, al-Qaeda. Guy Carpenter’s report makes it clear that the group has largely been eclipsed by recent events: “The core al-Qaeda group remains fully committed to launching major terrorist attacks against the West. However, the probability of successfully carrying out a large-scale attack has been reduced as the group has been marginalized by strong counter-terrorism measures around the world such as the death of bin Laden and the elimination of other senior al-Qaeda operatives in sustained drone strikes. Although core al-Qaeda’s top leadership has demonstrated a prolonged commitment to acquire and use NBCR material, the risk of such an attack remains low. Senior al-Qaeda leaders are therefore increasingly calling on individuals to carry out relatively unsophisticated attacks in their home countries while they attempt to plot more ambitious attacks. Notable intent and capabilities remain within al-Qaeda and the impact of any successful high-profile attack by the group in the West would likely be high.”

This article was published in the January 2015 issue of CIR Magazine.

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