Global businesses need to adopt formal structures to assess the ongoing risks posed by political instability and unrest in emerging markets if they are to protect their growing investment in these areas, according to leading international and speciality insurer ACE Global Markets (ACE).
Nearly 30% of senior executives and risk professionals surveyed for the latest global risk briefing report, conducted by the Economist Intelligence Unit (EIU) and sponsored by ACE, said their companies had been forced to cancel existing investments in emerging markets because of concerns about political risks. ACE believes that this points to a potential gap in the risk assessment process both in terms of an understanding of the risks and the level of ongoing risk management these companies make for existing investments.
For most companies, risk management is concentrated on the period when an investment opportunity is being considered. 80% of respondents said they consider political and operating risk as part of the due diligence process. However, only 44% revealed they monitor and manage risk on a continuous basis once the investment has been made.
Commenting on the report’s findings, Julian Edwards, Head of Political Risk at ACE Global Markets, said: “Emerging markets remain highly volatile but with these risks comes clear investment rewards. However, without formal processes businesses face potential exposure to unnecessary and additional risks which can impact directly on the performance of their investment and, in some circumstances, lead to cancellation.”
Over half of those surveyed said the risks associated with investing in emerging markets have increased in the past three years and in response many companies are increasing the time and resources dedicated to risk management. The survey also showed that stability of political regimes was one of the most significant threats to operations in emerging markets. In the past three years, the vast majority of companies that already invest in emerging markets (79%) deepened their investment over the period. 64% reported that rewards have increased.
Commenting on the findings Julian Edwards said: “The results of the global risk briefing clearly shows the growing appetite for extending investment in emerging markets. But, with less than half of those surveyed performing ongoing risk assessment as part of their investment programme the pace of growth and the potential returns could be affected. There is no doubt that maintaining a structured approach to risk management is crucial.”
Notes to Editors
ACE Political Risk
As one of the most experienced political risk insurers in the world, ACE offers innovative and comprehensive solutions that deliver confidence, security and peace of mind to clients across the globe. ACE possesses broad knowledge and understanding of the intricacies of country and credit risk and continues to lead ongoing development in this field, including the evolution of many political risk lines. ACE provides cost-effective strategies to mitigate cross border risk. Solutions are customer driven, but designed around 4 categories: financial institutions, exporters and importers, equity investors and contractor’s plant and equipment.
About the research
The Economist Intelligence Unit surveyed 177 executives around the world in October 2006 about their attitudes to operating risk management in the context of emerging market investments. The survey and paper was sponsored by ACE, IBM and KPMG.
Respondents represent a wide range of industries and regions, with roughly one-third each from Asia and Australasia, North America and Western Europe. Approximately 50% of respondents represent businesses with annual revenue of more than US$500m. All respondents have influence over, or responsibility for, strategic decisions on risk management at their companies.