Political ‘shock’ events increasingly disrupt multinational companies

Shock Events
Sudden geopolitical shifts such as changes in tariffs or the implementation of sanctions as well as terrorism are impacting global companies more than ever before, according to a recent survey. Multinational companies need to prepare for the impact this may have on their balance sheet and employees.

In a survey of Fortune 500 CEOs by DiversityMBA magazine, the top threat cited (40%) was increased regulation, trade friction and other political events and there are a variety of recent and current events driving some of this concern.

US tariffs on goods imported from China are affecting company supply chains. According to the Wall Street Journal, companies such as Crocs, Yeti, Roomba vacuums and Go Pro have started producing goods in countries other than China to avoid as much as 25% tariffs on approximately $250 billion of imports. Apple is also considering shifting final assembly of some of its devices out of China to avoid US tariffs.

In Europe, the UK’s exit from the EU will impact businesses, particularly if they:

•    sell or buy high volumes of goods or services to/from the EU
•    have highly integrated UK-EU supply chains, 
•    operate in highly regulated areas (financial, legal) or goods (chemicals, pharma)
•    sell/buy goods or services to/from one of the 50+ countries with which the EU has a Free Trade Agreement (FTAs)
•    benefit from EU Research and Development (R&D) grants and other funds, or
•    invest in UK based assets

If the UK was to leave the EU without a deal, a so-called “hard Brexit”, this would likely cause significant disruption at the border as tariffs would apply to all goods. Rules of origin would apply once the UK left the Customs Union, increasing the time, paperwork and cost required to ascertain the national origin of any product. UK financial firms would lose their passporting rights, and airlines would lose their EU flyover privileges.

A hard Brexit would cost the UK €57 billion per year, or €900 per capita, according to a study by the German think tank Bertelsmann Stiftung. EU countries would face a hit of €40 billion annually, according to some calculations.

Data from the UK government suggest that Britain is set to lose £130bn in lost gross domestic product (GDP) growth over the next 15 years if the Brexit deal negotiated by current prime minister Boris Johnson goes ahead.

Terrorism is another threat many companies face today. Per the Global Terrorism Index, the global economic impact of terrorism was $52 billion in 2018. This includes five countries with more than 1,000 deaths as a result of terror attacks.

The points above speak specifically to geopolitical/terrorism events that can endanger a business or its employees. However, there are a variety of “shock events” that can detrimentally affect both the balance sheet and safety of employees.

What if there is a fire at your main production facility and production ceases for two months?What if a country in which your business operates experiences a nationalist movement and that nation’s government confiscates your assets? How would your business, from the aspects of both profitability and employee well-being, recover from an active shooter crisis? Are the answers to the above questions consistent for all of your global operations? There are a number of actions companies can take to protect their business.

Identifying risks

From an enterprise risk management standpoint, the key consideration is to have a comprehensive understanding of your risk profile. Where is your stock located? What is the political environment in the country or countries where you operate? What is your US versus foreign risk? What are the links of the supply chain that lead to your finished product? Where are your employees located? Where do your employees travel? Identifying where your highest risk exposure lies allows you to develop a holistic strategy to mitigate risk, and further, determine what forms of risk transfer will be most beneficial for your balance sheet.

Protecting the balance sheet

The financial repercussions of a shock event can be significant. The most commonly used form of business interruption insurance is associated with property policies, and governmental actions are generally excluded. In an unendorsed property policy, to claim business interruption, the type of loss must be covered under the property policy. Examples of covered property losses include fire, lightning or explosion.

Would this coverage be beneficial in protecting the balance sheet if a factory had to close for two months due to a fire? Yes. However, there are other types of shock events that are not covered by this form of business interruption insurance that require further contemplation in understanding how to adequately protect against these risks.

Generally speaking, a trade disruption policy can indemnify against: 
•    Loss of profits 
•    Contractual penalties
•    Resourcing expenses 
•    Relocation costs 

Triggers can include: 
•    Trade embargoes 
•    Border closures 
•    Terrorism, war, strikes or civil commotion 
•    Confiscation or nationalization
•    Emergency closures to supply routes 
•    Insolvency 

A trade disruption policy is the most effective form of risk transfer for a company looking to protect its balance sheet against the perils of political shock events that could disrupt its supply chain.

A political risk policy can help protect a company’s balance sheet in the case of certain political events that affect their foreign assets. 
This policy can provide coverage for both asset and contract risk. Claim triggers regarding asset risk can include:

•    Confiscation, expropriation and nationalism
•    Forced abandonment or divestiture 
•    Deprivation
•    Political violence 
•    Trade disruption and business interruption 

Claim triggers for contract risk can include:

•    Contractual default for nonpayment of goods or services, or nondelivery of goods or services paid for in advance
•    Contract frustration by the government of a foreign country
•    War or political violence
•    Wrongful calling of on-demand contract and bid bonds

Like trade disruption, net asset value is used to determine the amount of the covered loss. From a risk transfer perspective, this policy is beneficial in minimizing the impact of a shock event on a company’s foreign entities due to the political actions of a foreign government or its citizens.

Protecting employees

The political environment of a country can be an indicator of the safety of employees around the world. For good reason, insurance is one of the last thoughts that may come to mind in the case of a shock event that causes harm to employees. As companies move forward, the financial and morale consequences of this type of loss can be detrimental. In response to this type of risk, Lockton developed a product called Terrorism Crisis Solutions. This coverage can include:

•    Terrorism and sabotage coverage
•    Therapy for affected employees
•    Loss of attraction
•    Active assailant
•    Business interruption

Clean-up and forensics

Geopolitical turmoil is a reality for global companies. Key impacts may come from business interruption, trade disruption, confiscation of foreign assets or harm to employees. An overall risk evaluation is needed to determine how a supply chain can be affected by a shock event and the extent of its severity. At Lockton, we have teams dedicated to these specific types of risks.

If you would like to find out more, please contact: 

Sarah Horler, Partner
Direct Tel: +44 (0)20 7933 2726
E-mail: Sarah.horler@uk.lockton.com
or
Christopher Weaver, Account Manager
Tel: +1 816.960.9632
E-mail: cweaver@lockton.com
 

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