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Aon’s 2013 Interactive Political Risk Map draws on fifteen years of emerging markets data collection

19 March 2013 Aon

As the world seeks to re-establish itself following the 2008 financial crisis and the 2010 Arab Spring, Aon’s 2013 political risk map, developed in partnership with Roubini Global Economics, identifies certain emerging markets that are experiencing reduce

To complement its print version, Aon Risk Solutions, the global risk management business of Aon plc (NYSE: AON), today unveiled a new online and interactive political risk map with data going back over 15 years. The map measures political risks, political violence and terrorism in 163 countries and territories to help companies assess the risk levels of exchange transfer, legal and regulatory risk, political interference, political violence, sovereign non-payment, and supply chain disruption. In 2013, for the first time, the Aon Political Risk Map also measures banking sector vulnerability, risk to fiscal stimulus and risk of doing business. The map can be accessed at http://www.aon.com/2013politicalriskmap/index.html

The Aon Political Risk Map produces high level country overviews and tailored comparisons of country ratings and changes in risk over time. By accessing Aon’s interactive map, institutions can track their specific political risk exposures in emerging markets, both on a current and historical basis. The map data will be updated quarterly and at the time of significant political risk events.

For 2013, Aon’s Political Risk Map shows an increase in the number of countries with upgraded political risk ratings (where the overall country or territory risk is rated lower than the previous year). 13 countries were upgraded in 2013 as opposed to 3 in 2012.The 2013 map also shows only 12 countries experiencing downgrades in comparison to 21 in 2012. A list of these countries and the risks facing entities doing business with or in them are described below.

Leading insight from a leading team

Aon’s long-standing strength in Political Risk management has been bolstered this year by partnering with Roubini Global Economics (RGE), an independent, global research firm founded in 2004 by renowned economist Nouriel Roubini, in order to take advantage of RGE’s unique methodology, Quantitative Country Analytics (QCA), for systematically analysing political risks around the world. Unlike other approaches to country risk, QCA systematically analyses 158 data series, and provides clients with an unparalleled level of transparency on how each country is assessed.

 The Aon Political Risk Map is unique as it now follows a 3 layered approach in analysing political risk in emerging countries (excluding EU and OECD countries). Country ratings reflect a combination of:
• analysis by Aon Risk Solutions
• analysis by Roubini Global Economics
• the opinions of 20+ Lloyd's syndicates and corporate insurers actively writing political risk insurance.

Luigi Sturani, head of Aon Risk Solutions’ property, casualty and crisis management team of the Global Broking Centre in London, commented, “With political risk rising up the boardroom agenda, our clients must have access to first-class data and analytics to determine the global drivers of change. Aon’s leading crisis management expertise combined with the current and historical data means we can provide our clients with a valuable and in-depth Political Risk Map unsurpassed in the market.”

Matthew Shires, head of Aon Risk Solutions’ political risk team in London, comments, “Aon is always looking at ways to provide innovative solutions for our clients. This interactive map, now available online, not only allows our clients to see what is happening in selected regions in 2013 but now offers access to the insights from our leading team going back as far as 1998. This will inform our clients’ strategic and financial decision-making in today’s highly regulated and demanding marketplace.”

Shires added, ”Despite the upgrades this year, businesses operating in emerging markets still face significant political risks. We work closely with our clients to identify their exposures to these risks. Supported by powerful data and analytics of current and historical trends this new interactive map gives clients unprecedented clarity when assessing their political risks in the emerging markets.

Richard Green CEO, Roubini Global Economics, said “Roubini Global Economics is proud to partner with Aon to deliver this insightful approach to mapping political risk and political violence for its clients. This year the political risk exposure across emerging markets remains volatile, however our data illustrates a differentiation led by a country’s financial ability to bolster its balance sheets. Our analysis indicates that Oman, Bahrain and UAE have all experienced upgraded political risk exposure, illustrating their strength in the region to withstand the impact of the 2010 Arab Spring. The unique and interactive Aon Political Risk Map will give clients a fresh insight into the trends in emerging markets and a quarterly snapshot of how political risk is evolving based on the industry’s strongest research.”

Map overview:

2013 Upgrades and Downgrades in Country Ratings
Upgrades (where the overall country or territory risk is rated lower than the previous year)
13 upgrades (2012: 3 upgrades): Armenia, Azerbaijan, Bahrain, Barbados, Belarus, Guatemala, Macedonia, Montenegro, Oman, Pakistan, Swaziland, Thailand, the United Arab Emirates

Downgrades (where the overall country or territory risk is rated higher than the previous year)
12 downgrades (2012: 21 downgrades): Algeria, Cameroon, Chad, Ethiopia, Madagascar, Mali, Namibia, Moldova, Turkmenistan, Uzbekistan, Panama and Paraguay.

Trends:

More upgrades than downgrades: After several years of greater downgrades due to the Arab Spring, the political effects of the global financial crisis and persistent strains in South Asia - political risk has eased in 13 countries, compared to downgrades in 12 countries. We identified the following trends:

Improvements on Europe’s Periphery

Several Central Asian and Caucasus countries – Azerbaijan, Armenia, for example, showed improvement, admittedly from a low base. This reflects a concerted effort in emerging Europe and Commonwealth of Independent States toward structural reform to attract investment and to increase market share. While there is still room for improvement, the persistent economic strain in Western and Eastern Europe increased economic pressure on several regional governments and brought downgrades in Moldova and Uzbekistan, (the improvement in government institutions mitigates the effect of these risks on investments by strengthening country balance sheets

A new order in the Middle East

After dominating the downgrades in 2012, three Middle Eastern countries (Bahrain, Oman and UAE) were upgraded in 2013, reflecting a stabilisation and differentiation of political risk in the MENA region. While this might be temporary, as the region is still fragile, this crystallises a divergence in the region between the countries with stronger economic and financial institutions and those with greater wealth which increases their resilience to adverse political and economic events. Moreover, it underscores the importance of strong corporate and financial institutions which cushion the effects on individual countries.

Aftershocks in Western Africa

Cameroon, Chad, and Mali all were downgraded, along with adjoining Algeria, reflecting the spillovers from the difficult regime changes in North Africa which destabilised these countries. Flows of weapons and insurgents across borders have exacerbated high political risk. Developments so far in 2013 indicate the potential for further downgrades.

About the 2013 Aon Political Risk Map

Aon measures political risk in 163 countries and territories to assess the risks associated with exchange transfers, sovereign non-payment, political interference, supply chain disruption, legal and regulatory regimes, political violence, ease of doing business, banking sector vulnerability and governments’ capability to provide fiscal stimulus. In each specific risk category, as well as the overall rating, each country is rated as Low, Medium-Low, Medium, Medium-High, High or Very High. Member countries of the European Union and Organisation for Economic Cooperation and Development are not rated in the 2013 map.

Country ratings reflect a combination of analysis by Aon Risk Solutions, Roubini Global Economics—a global analysis and advisory firm—and the opinions of 26 Lloyd's syndicates and corporate insurers actively writing political risk insurance.

Roubini Global Economics and Quantitative Country Analytics

Aon partnered with Roubini Global Economics, an independent, global research firm founded in 2004 by renowned economist Nouriel Roubini, to produce the 2013 Political Risk Map in order to take advantage of RGE’s unique methodology, Quantitative Country Analytics (QCA), for systematically analysing political risks around the world. Roubini’s proprietary Quantitative Country Analytics allows RGE and its partners to track changes in countries systematically, provides meaningful cross-country comparisons and, most importantly, decompose each risk to uncover the various elements that drive that risk.

As well as producing more robust results, Aon’s shift to this methodology will allow its clients the opportunity to interact with the risk map. They will be able to perform such tasks as decomposing each risk icon and monitoring the drivers of changes in risk icon scores.

Each country on the map is rated according to the different types of risks it faces. These risks are indicated by the individual icons, with the first six icons driving the overall country rating, and the three new icons included for additional information.


Brief Descriptions of Each Risk Icon

Country rating on the map derives from six core risk icons, which represent insurable risk and these are;

Exchange Transfer: The risk of being unable to make hard currency payments as a result of the imposition of local currency controls. This risk looks at various economic factors, including measures of capital account restrictions, the country’s de-facto exchange rate regime and foreign exchange reserves. This risk icon has been newly added to 29 countries and territories since the 2012 map, including Bermuda, Cameroon, Sri Lanka, and Ukraine. This risk has receded in 13 countries, including Albania, Cambodia, Paraguay, and Zambia.

Legal and Regulatory: The risk of financial or reputational loss as a result of difficulties in complying with a host country's laws, regulations or codes. This risk comprises measures of government effectiveness, rule of law, wider property rights and regulatory quality. This risk icon has been newly added to 2 countries and territories since the 2012 map: Armenia and Mali. This risk has receded in 10 countries, including Brazil, Croatia, Peru, and Saudi Arabia.

Political Interference: The risk of host government intervention in the economy or other policy areas that adversely affect overseas business interests; e.g., nationalisation and expropriation. This risk is composed of various measures of social, institutional and regulatory risks. This risk icon has been newly added to 3 countries and territories since the 2012 map: Guatemala, Honduras and Moldova. This risk has receded in 14 countries, including El Salvador, Peru, Thailand, and Zambia.

Political Violence: The risk of strikes, riots, civil commotions, sabotage, terrorism, malicious damage, war, civil war, rebellion, revolution, insurrection, a hostile act by a belligerent power, mutiny or a coup d'etat. Political violence is quantified using measures of political stability, peacefulness and specific acts of violence. This risk icon has been newly added to 21 countries and territories since the 2012 map, including Argentina, Philippines, Russia, and Serbia. This risk has receded in 12 countries, including Columbia, Kuwait, Indonesia, and Oman.

Sovereign Non-payment: The risk of failure of a foreign government or government entity to honor its obligations in connection with loans or other financial commitments. This risk looks at measures of both ability and willingness to pay, including fiscal policy, political risk and rule of law. This risk icon has been newly added to 12 countries and territories since the 2012 map, including Gambia, Lesotho, Russia, and Senegal. This risk has receded in 7 countries, including Bosnia, Croatia, Trinidad & Tobago, and the United Arab Emirates.

Supply Chain Disruption: The risk of disruption to the flow of goods and/or services into or out of a country as a result of political, social, economic or environmental instability. This risk icon has been newly added to 47 countries and territories since the 2012 map, including Algeria Burundi, Mali and Tunisia. This risk has receded in 8 countries, including Brazil, China, India and Panama.

Icons new to 2013 and not used in overall country rating

Risks to Doing Business: The regulatory obstacles to setting up and operating business in the country, such as excessive procedures, the time and cost of registering a new business, dealing with building permits, trading across borders and getting bank credit with sound business plans. This risk is found in 96 countries, including Argentina, Bolivia, Dominica, Nigeria and Russia.

Banking Sector Vulnerability: The risk of a country’s domestic banking sector going into crisis or not being able to support economic growth with adequate credit. This risk comprises measures of the capitalisation and strength of the banking sector, and macro-financial linkages such as total indebtedness, trade performance and labor market rigidity. This risk is found in 106 countries and territories, including China, El Salvador, India, and Thailand.

Risks to Fiscal Stimulus: The risk of the government not being able to stimulate the economy due to lack of fiscal credibility, declining reserves, high debt burden or government inefficiency. This risk is found in 94 countries and territories, including Albania, Liberia Morocco, Tanzania and Uganda.

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