Businesses on the frontline of civil unrest

Published by Flemmich Webb on

By Garry Booth

The tense atmosphere surrounding the Brexit negotiations was taken to a new level recently when Amazon’s UK CEO Doug Gurr said that there could be “civil unrest” within two weeks if Britain leaves the European Union without a deal.

Some commentators described his statement as inflammatory, although Gurr said that civil unrest was a worst-case outcome that formed part of his contingency planning.

But he’s not alone in drawing attention to the potential for damage caused by a breakdown in social or political orders. The World Economic Forum’s recently published Global Risks Report 2018 said that “democracy is already showing signs of strain in the face of economic, cultural and technological disruption”.

If an evenly divided country sees polarised positions harden into a winner-takes-all contest, WEF said, the risk of political debate giving way to forms of secession or physical confrontation increases.

Cities are invariably the flashpoints for unrest and there are numerous examples from around the world of just how economically damaging such events can be. Last year’s G20 summit in Hamburg was met with two nights of fierce rioting by anti-globalisation protesters that a 15,000 strong police force struggled to contain.

The root causes of social instability are diverse, however. The WEF notes the links between food and water crises and unrest, for example, as well as failure of urban planning and underemployment among others.

It’s worth remembering that the 2010–2011 Arab Spring, was itself driven in part by food shortages and price spikes, as shown in this Lloyd’s study. The Arab Spring also showed civil uprisings can be contagious and evolve into civil war.

Civil conflict and social unrest feature strongly in Lloyd’s City Risk Index, which measures the impact of different threats to the economic output of 279 cities.

In Europe, Eastern European cities, especially in Russia are most vulnerable to civil conflict. Moscow could lose $989m every year on average with Kiev at $504m and St Petersberg at $228m. The index indentifies the three as the highest ranked cities in the continent in terms of GDP at risk.

Western European cities are more likely to take an economic hit from social unrest. Madrid and Barcelona head the index’s ranking due to issue of Catalan independence, with potential annual impacts of $118m and $73m respectively. London also features with $85m of lost economic output annually.

Fifty years on from the historic direct action by students and strikers that paralysed Paris in 1968, civil conflict could cost France’s capital city $68m every year on average these days.

Asia features prominently in the global rankings for civil conflict and Jakarta in Indonesia stands to lose the most- $1.86bn every year on average – more than any other city in Asia, and third in the global rankings. In terms of social unrest, China dominates the rankings with Shanghai ($49m) followed by Beijing ($40m) and Yangon ($35m).

Many other cities around the world have high potential for social unrest created by wealth inequality, serious unemployment and poverty, especially in Latin America and Africa. The Nicaraguan capital Managua has been a focal point for violent clashes between protesters and the government for months, leaving hundreds dead. African and Middle Eastern cities can expect to lose more than $61.44bn to geopolitical and security risks annually, Lloyd’s City Risk Index reveals.

Looking at the frequency of protests around the globe, data shows an upward trend since the early 1990s, according to Virag Forizs, political risk analyst at global risk consultancy Verisk Maplecroft. With an increasing number of unrest incidents, the potential for adverse business impacts is also growing, he warns.

“Personnel and commercial assets might be in direct danger, while the effect of infrastructure disruption is more indirect. Countermeasures for these short-term impacts include putting in place security policies, taking out insurance and planning alternative logistics routes. In the longer term however, unfavourable policy responses to demonstrators’ demands also pose a risk,” Forizs says. “Understanding the local context is key, both in the short and long term when considering the risk of civil unrest.”

Even where a company’s property is not directly affected, its business can be interrupted for long periods, either because of lack of access to premises or supply chain disruption.

Clearly, companies with operations in high risk areas should have contingency plans in place to protect their facilities and, most importantly, their employees. Depending on a company’s activity, they should have back-up locations to use in times of unrest and alternative supply lines.

It also makes sense for businesses and investors to consider transferring some of the financial risk they face from civil unrest. Insurance to protect foreign companies against financial losses through damage to assets or contract frustration is termed political violence cover and it’s usually considered to be a subset of political risk insurance.

The market for all types of political risk insurance has grown substantially in the past 10 years, with more than 50 insurers – including market leaders at Lloyd’s – participating. According to Lloyd’s broker BPL Global, the combined theoretical global capacity stands at around $3bn per transaction, making it a dynamic and competitive marketplace.

Some multinational companies manage the risk of political instability and violence through a combination of political violence and terrorism insurance, apart from political risk cover which also directly addresses government actions such as expropriation or currency inconvertibility.

It’s not uncommon for different risks to be manifest simultaneously in a country experiencing a severe crisis. In 2010, nearly 100 people were killed in Bangkok during political protests against the Thai government and damage to property exceeded $1bn. The government said the events were acts of terrorism, but insurers countered that the demonstrations fell under the definition of political violence or strikes, riot, and civil commotion rather than terrorism.

As with resilience and contingency planning, risk professionals agree it’s increasingly important to make sure that political violence insurance coverages are carefully coordinated before trouble even starts brewing. To echo Doug Gurr’s warning, in situations like Brexit, the transition to a full-blown crisis can sometimes be a lot quicker than people expect.

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