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Understanding the geopolitical risk landscape

Geopolitical Risk Mitigation. How can businesses and governments develop a deep understanding of connected risk in order to mitigate successfully?

Geopolitical risks are complicated to evaluate. They are interconnected and often highly volatile, prompting shifts between global power centers and impacting businesses. This is why businesses and governments need to understand the deep connections between risks and find innovative ways to mitigate them.

To show how easily risks can quickly cascade, creating a complex and volatile geopolitical situation, the Zurich Risk Room analyzed the network of factors that contributed to the Arab Spring of 2011. Their work formed the basis of a model that businesses can use to help understand their exposure economic disparity. The key is for businesses to understand that in a world connected by the internet and globalization, a company can be affected by geopolitical risks crystalizing halfway across the world.

The Arab Spring - interconnected risks

Understanding how risks are connected

By broadening their view of geopolitical risk businesses and governments can begin to see that risks never exist in isolation. Understanding how risks feed into one another can begin to inform an effective risk mitigation strategy.

Businesses and governments must focus not only on the risks themselves, but on how risks are connected.

Businesses must look not only at the risks, but also focus on the connections Businesses must look not only at the risks, but also focus on the connections

A single risk can quickly cascade, causing far reaching geopolitical impact

Example of cascading risks (desktop version) Example of cascading risks (mobile device version)

Staggering Implications

The Our World Transformed: Geopolitical Shocks and Risks 2017 report demonstrates the staggering implications of interconnected risks, with 3 geopolitical risk scenarios. While speculative, these scenarios show how connected risks can coalesce with dramatic effect.

Please select a category and a scenario

Scenario Category Scenario Description type-1;GDP;billion USD;$ type-2;Upper and Middle Class;million people type-3;Instability;countries type-4;Extreme Poverty;million people
Base Case base In this study, a singular base-case scenario is used to get a sense of the possible deviation from what most assume will be the future trend. The timescale is to 2035, allowing a view of these uncertainties' long-term impact. 141400 3950 - 710
Nativist Victory protectionism In the Nativist Victory scenario the Atlantic Council report examines a significant reduction in trade in goods and services and FDI as a share of GDP -18000 -54 64 33
Globalism Resurgence protectionism The Globalism Resurgence scenario is set around a rebound in trade in goods and services and FDI, which could include modified versions of TPP and TTIP. 25900 68 0 -22
Constrained Energy energy In the Constrained Energy scenario, other sources of energy, including renewables, cannot make up for the losses in a world in which Middle East OPEC oil production is significantly reduced. There is a 35% increase in total world energy prices. Russia, Canada, China, Brazil, US, and Venezuela increase production by an additional cumulative 20 billion barrels of oil. -54400 -93 26 23
Accelerated Renewables energy In a world in which Middle East OPEC oil production is significantly reduced, the Accelerated Renewables scenario explores what could happen when renewables become more competitive. In this scenario energy prices rise in the short term and spur further investment in the development of renewables. -46400 -76 24 16
Arid Earth food-water-scarcity The Arid Earth scenario looks at a world with increased water scarcity, with exploitable water resources reduced by 60% by 2035. -1800 -11.5 15 6.8
Severe Weather food-water-scarcity The Severe Weather scenario looks at the impact of increasingly volatile and erratic water patterns, leading to more frequent droughts, flooding, soil erosion and more variability in crop yields. -7000 -38 21 21

Source: Our World Transformed: Geopolitical Shocks and Risks 2017

Geopolitical turmoil is worrying: geopolitical tensions are the highest they have been since the end of the Cold War with increased interstate conflicts, state collapses, and dangerous non-state actors. Companies are faced with a wide range of political dangers: riots halting production; violence damaging assets; danger of capital controls preventing currency exchange and conversion; governments unexpectedly defaulting on loans or cancelling projects, revoking licenses or expropriating assets. Sectors with a specific exposure to these risks include oil/gas, mining, retail, defense, infrastructure developers, technology and many others with exposure to the emerging markets.Some organizations have reacted urgently to the environment by incorporating political risk into their overall risk assessment process, but a majority of firms still have not come to terms with political risk, or even with who within the organization should be responsible for it.

David H. Anderson
Executive Vice President and Managing Director Credit & Political Risk, Zurich Insurance Group

What can businesses and governments do?

  • Identify the key risks
  • Broaden your view
  • Develop innovative mitigation strategies
Identify potential supply chain disruption and develop business continuity plans, Purchase supply chain insurance to protect against the impact of disruption, Increase supply chain and business asset security considerations and spending, Use scenario planning tools to map the second and third order effects resulting from identified risks, Develop early warning systems to provide actionable intelligence about environmental risks See above (this image is for mobile)

Read the full report: Our World Transformed: Geopolitical Shocks and Risks.

Some of this content originates from a third party, not from Zurich. Zurich does not verify this third-party content and neither endorses nor adopts it as its own. Zurich cannot guarantee the accuracy of such content and assumes no liability in connection thereto. It is also not tied to any specific insurance product nor will it ensure coverage under any insurance policy.