May 1, 2007

Terrorism and Political Risk

Global businesses are becoming increasingly concerned about political violence risk but too few are devoting the necessary resources to understanding it, alarming new research has revealed.

‘Under Attack: Global business and the threat of political violence’, a report issued in May by the Economic Intelligence Unit (EIU) in partnership with Lloyd’s, has shown that concerns at board level regarding terrorism and political violence risk are causing businesses to avoid investing in politically sensitive areas or locating offices in large cities.
 
The research, which was undertaken with 154 global business leaders, reveals that over a third of companies avoid investing in overseas markets for fear of political violence, while 20% have relinquished promising business opportunities for the same reason. However, there appears to be a significant gap between risk awareness and an actual understanding of the key threats.

The four major emerging risks cited by survey respondents were supply chain risk, cyber-terrorism, home-grown terrorism and chemical, biological, nuclear and radioactive (NCBR) attacks.

Lloyd’s Chairman Lord Levene believes businesses need to understand their risks better. He says: “There is a large gap between what businesses perceive as a threat and the reality. Many companies are changing their plans based on perceived threats, which is a problem if their information is incorrect.”

The report, which launches the second series of Lloyd’s 360 Risk Project, showed that over 60% of the businesses questioned rely on international media coverage to come to a decision on what risks they face. Lord Levene said this is where businesses can become misinformed.

“Media coverage tends to focus on radical religious terrorism and rarely touches on the emergence of new risks, such as threats to supply chains, cyber terrorism, home grown terrorism and the threat of chemical, biological, nuclear and radioactive attack,” he said.

Dr. Paul Kielstra, author of the report and a contributor to EIU, also believes businesses are placing too much emphasis on the wrong information. “Only 30% of business leaders had a good understanding of the political violence risks they face. There is not a lot of work going into getting information. We need a reality check. Businesses tend to be focusing on the wrong kinds or risk, such as preparing for international war and huge bomb blasts. In fact international war is declining; the number of terrorist incidents, if you factor out Iraq, are lower than they have been for many years,” he said, adding: “We know Al Qaeda is out there. It is a concern to be aware of, but more information would give businesses more idea of what is out there, and what does not need to be worried about so much.”

Despite terrorism and political violence risks hampering businesses’ expansion and investment plans, over 37% of all companies surveyed had either no continuity plan in place at all or one that does not adequately take account of political violence risks.

But according to Chris Parker, Head of Terrorism at Marsh UK, the insurance marketplace is responding to the threats. Parker said that around $1.2bn of capacity is now available from the private market for standalone terrorism coverage, compared with $75m-$100m prior to September 11, 2001. He also said a new product had been launched, with $100m capacity, to cover NCBR risks.