Political risks rarely have isolated effects – they ripple across an entire company, aggravating other types of risk all the way back to Canada.
Consider the fictional ABC Corporation, which has profitable operations in a Sub-Saharan African country.
The foreign currency reserves of the African country where ABC Corporation does business become almost depleted due to the decline in commodity prices. This results in ABC being unable to transfer back to Canada a large sum of money held in an African bank account.
Without Political Risk Insurance
- ABC cannot repay an outstanding amount on its bank line of credit in Canada.
- Given that its line of credit is almost fully utilized, ABC needs to take aggressive steps to preserve cash. Consequently, it turns down orders from several new customers.
- This tarnishes the company’s reputation with potential customers. Its credit rating drops with suppliers and banks.
- ABC has to delay payment to key suppliers and holds out on bidding on new opportunities that will inevitably be won by its competitors.
- Future sales growth is compromised and cash flow becomes further strapped as suppliers respond by providing less favourable payment terms to ABC.
With Political Risk Insurance
- ABC can pivot and continue to thrive, knowing it has protected its profits, future growth and investors with proper safeguards.
- ABC’s insurance policy covers up to 90% of its losses due to this uncontrollable event.
As you can see, it only takes one bad experience to make a company believe in managing and mitigating political risk. Having a solid political risk management plan bolstered by appropriate insurance coverage can protect your company from any unnecessary losses that are beyond your control.