Terrorist, economic and political risk great, says report

Insurers face much greater political and economic risks across the world in 2009, a leading consultancy company warns.

An economic downturn combined with an untried US President, Barack Obama, means next year will be a year of profound change and turbulence, a report from Control Risks says.

The report rates Pakistan as the top country for potential kidnappings, followed by Mexico, a tourist hotspot.

The report breaks down four categories (see attached report to see global risk map)


Volatility in commodity markets indicates that the world is testing its limits for food production, mineral refinement and energy extraction.

There are mounting concerns over water availability, infrastructure capacity and institutional integrity.

Scarcity will weigh heavily on 2009, though some of its immediate manifestations – such as high commodity prices – will recede in the short term as the financial crisis takes its toll on businesses and consumers.

A consensus is emerging among companies and policymakers that dealing with the implications of scarcity, from pacifying street protests against rice shortages to hedging against jet fuel price volatility, will be at the heart of strategic planning in the coming years.

Consequently, a range of coping mechanisms are being implemented at and between the government and corporate levels, some developed in response to acute shortages this year and others planned in anticipation of future constraints.

Many of these are co-operative, as in the case of regional food banks and power infrastructure links. Others are competitive, such as the acquisition of hydrocarbon leases, water rights or arable land abroad.

The interplay between the public and private sectors is crucial: how governments respond to the pressures of scarcity will shape the business and operating environments, while how companies seize emerging opportunities and manage evolving risks from scarcity will be a decisive determinant of profitability. The coming year is unlikely to witness ‘resource wars’, but domestic politics and international relations will undoubtedly begin to set the terms of our post-surplus world.

Financial Crisis:

With asset prices collapsing, credit in short supply and conflicts smouldering in several regions, many investors view 2009 as a year to retrench and regroup.

Emerging markets that have posted rapid growth rates over the last five or ten years – and even some mature, industrialised countries – suddenly look economically and politically fragile.

Equity and commodity markets continue their rollercoaster rides, while fixed-income assets seem increasingly vulnerable to default.

All in all, companies see a much more precarious business environment, and are understandably wary.

But the impact of the financial turmoil will vary, depending on both a country’s exposure and its government’s response.

Attractive investment opportunities can still be found, with the crisis likely to generate prospects for mergers and acquisitions, market entry and operational partnerships.

However, there will be a premium on closer monitoring and evaluation of the changing operational environment, and a strategic attitude to complex emerging security and political risks.

Rather than punishing investors generally, 2009 will reward those companies poised to capitalise on effective risk management and seize good deals.

US election implications:

On 20 January 2009, Barack Obama will take the oath of office as the 44th president after sweeping to election victory with his rhetoric of change.

But as the brouhaha of the campaign dies down and the change in administration looms, the immense challenges and complications that he will inherit are coming into focus.

Domestically, Obama will have to balance competing claims on limited resources, while managing the high expectations of his ardent followers.

The starting point though, is so low, that any improvement will go a long way towards creating positive momentum, especially with the change in tone that Obama brings to the presidency.

However, if the economy does not begin to turn by the second half of 2009, Obama may have to fight against some of his and his party’s instincts and avoid overt protectionism and other forms of economic populism, which may end up hurting the economy’s medium-to-long-term prospects and sow the seeds of larger disappointments in 2010.

In foreign policy, the change in administration and Obama’s popularity will go a long way towards helping to restore the US’ image in the world and to rebuild its battered alliances.

However, expectations of significant policy changes will be dashed, especially if those intent on hijacking US policy prove successful in challenging the new administration through a terrorist attack or geopolitical crisis. In the end, the main potential pitfall for Obama is the high expectations that the change in power will create.

Obama’s initial focus will be domestic. In particular, he must confront the oncoming recession, rising unemployment and the collapse of housing asset prices and credit.

Working with Congress, the Federal Reserve and the Treasury, his priority will be to restore confidence in the financial system and put in place a new regulatory architecture to address the shortcomings that fostered the current crisis.

Only once these matters have been ‘dealt with’ will traditional issues – such as health-care reform, immigration and the infrastructure deficit – come to dominate the political agenda, though probably not until near the end of 2009.

Kidnapping, a global phenomenon:

Top ten kidnapping-for-ransom countries:

1. Pakistan 6. Afghanistan

2. Mexico 7. Colombia

3. Venezuela 8. Somalia

4. Nigeria 9. Brazil

5. India 10. Philippines

(January - November 2008. This list is based on the total number of incidents about which Control Risks has been able to obtain reliable information.)

For many years, kidnapping-for-ransom was mainly associated with Latin America. Whether from the jungles of Colombia or the sprawling cities of Mexico and Brazil, stories of victims being held in exchange for payment or political concessions became familiar.

But kidnap is changing, and the stories now also come from the swamps of the Niger delta, the turbulent cities of Iraq and ships in the Gulf of Aden. A new environment in parts of Latin America has combined with shifting trends in terrorism, piracy and militancy elsewhere to metamorphose kidnapping into an altogether more global phenomenon.

The shift towards kidnapping becoming global coincided with growth in the number of ideological kidnaps and increasingly groups with a political or other agenda generally use kidnapping as a fund-raising tool. Islamist extremists are rarely steadfastly ideological in their demands.

One of the most visible developments in kidnap outside Latin America in recent years has been its adoption by pirates.

The number of reported piracy incidents involving kidnapping-for-ransom has surged in 2008. The evolution of piracy into a full-scale kidnap-for-ransom operation has presented the shipping industry with a new and difficult problem.

The disruption caused to shipping business by such incidents, which can last for several weeks, is considerable, as are the implications for finances and employee welfare.

Kidnapping has become more of a global concern than at any time in the past. Not only has the number of countries harbouring serial kidnap groups expanded, but so has the range of victim profiles and demands.

The kidnapping dynamics in any given country are ever more changeable and new hotspots are likely to emerge in 2009.

In such a varied environment, it is important for companies to take the kidnap risk to their employees into account.

This requires a good understanding of the regional variations and changing local dynamics underlying security issues such as kidnapping in each country of operation.