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Losses that can stem from political risk can range from relatively small sums to hundreds of millions of dollars, says Albert van Eeden, director of political risk insurance with Export Development Canada.Dave Chan/The Globe and Mail

As Canadian companies seek markets in developing areas, they can encounter business risks that range from outright war to slippery regulations.

"Emerging markets tend to have a different risk profile than developed markets," explains Albert van Eeden, the Ottawa-based director of political risk insurance with Export Development Canada.

In many cases, Mr. van Eeden notes, that risk comes on the political front thanks to the lacklustre rule of law or the tumultuous nature of some countries' social, cultural, political, economic and even military frameworks.

Enter political risk insurance (PRI), a way to hedge against the many threats an organization might face while conducting business in a developing or politically unstable country.

This type of coverage can often shield organizations from a wide range of bottom line-damaging circumstances – ranging from armed conflict to currency fluctuations – and is most often used by companies in industries such as infrastructure development, oil and gas exploration, or mining, which often operate in emerging markets.

That said, Mr. van Eeden has seen it used by organizations of all sizes and across sectors.

But as he points out, CEOs should understand that PRI policies can vary widely – some policies might insure against terrorist attacks, for example, while others don't.

That means they need to know exactly what they're buying and how to factor it into an internationally-focused business expansion model. And knowing what to buy depends entirely on the company in question, its industry and the country in which it's doing business.

Sometimes the threats are less than obvious. Mention political risk and thoughts turn almost immediately to government coups, civil wars, guerrilla insurgencies and terrorist bombings – all valid threats, to be sure.

But as Mr. van Eeden points out, some of the more common political threats include sudden changes in laws and regulations, import-export restrictions, foreign exchange restrictions that affect a company's ability to transfer funds into or out of a country, breach of contract on the part of a government – or even government expropriation of assets.

Indeed, a 2013 World Bank survey of investors globally found that adverse regulatory changes and breach of contract ranked at the top of perceived threats to doing business in developing markets. Only 7 per cent considered war a major concern.

Of course, organizations first have to recognize this sort of risk before they can insure against it. Many in Canada do not, according to Nicholas dePencier Wright, president and CEO of Toronto-based global risk consultancy Geopolitical Monitor Global Solutions.

As Mr. Wright notes, our prized political stability at home often instills a false sense of security in CEOs who venture abroad, distracting some from the potential risks they face in overseas markets.

"Canada is very multicultural, and because we're geographically isolated, with the U.S. as a neighbour, and because our foreign policy follows that of the U.S., Canadian business has been less aware of the very real threats to assets and operations in high-risk operations around the world," he says.

That means few companies fully understand the financial impact that political risk could have on their business – and that's not just a Canadian phenomenon.

According to a 2013 survey of more than 1,400 public and private companies around the world by HR consulting firm Aon Risk Solutions, just 33 per cent said they track the total cost of risk in their respective export markets, then factor that cost into their business plans.

Not sure how to know when the time is right to take out political risk insurance? It starts by gaining a deep understanding of your overseas market, according to Tulio Conejeros, vice-president of business development for Rainmaker Global Business Development in Calgary.

His first recommendation: Think globally, but get help locally. "You need to find someone local that understands the environment and the political side who can help manage those risks, then provide feedback as to areas where you might be at risk in future," Mr. Conejeros says.

Assessing that risk is crucial in determining what policy is right for your organization, he adds. The reason: Not all policies are created equally. Some provide far less coverage than others.

"It's great to have any type of insurance, but it has to cover the specific risk that you're facing in a given country," Mr. Conejeros stresses, adding that even in developed or relatively stable countries, issues such as foreign exchange fluctuations or restrictions – limiting the free flow of funds across borders, for example – can throw a wrench into an otherwise well-planned global expansion strategy.

The best practice, according to Mr. van Eeden, is to think proactively, carry out this research in advance and, if necessary, purchase political risk insurance before establishing operations in any country where there is a history or threat of instability.

"It's hard to insure a burning house," he says, noting that failing to spend the roughly 0.2 per cent to up to 4 per cent a year that it takes to insure the value of a protected asset can have dire financial consequences for an organization.

He notes that, in addition to Export Development Canada, more than three dozen insurers worldwide offer varying levels of political risk coverage.

So, why bother incurring the expense of PRI?

According to Mr. van Eeden, losses that can stem from political risk can range from relatively small sums in the low hundreds of thousands of dollars – although still a potentially catastrophic amount for any small to medium-sized business hoping to carve out a market abroad – to hundreds of millions of dollars in cases where a change in government leads to the cancellation of a major contract with a multinational firm, or a project's outright abandonment due to some form of instability.

Mr. Van Eeden's advice: Leave no stones unturned when it comes to assessing risk.

"Investors should develop a comprehensive enterprise risk management approach," he says. "They need to consider all risks across the spectrum and pay special attention to political risk, which can be catastrophic in nature."

OTHER RISKS

While political risk insurance can play a major role in any organization's global expansion strategy – particularly if it involves establishing operations in developing or politically unstable countries – it isn't the only factor to consider when protecting against the many potential threats faced while doing business abroad.

"My overarching message is that political risk is one that businesses in Canada aren't adequately taking it into account," explains Nicholas dePencier Wright, president and CEO of Toronto-based global risk consultancy Geopolitical Monitor Global Solutions.

With that in mind, however, he feels that organizations can and should protect their assets from a wide range of potential threats that extended beyond the political. He recommends taking these steps when setting up operations overseas:

Choose your partners carefully

Verifying the credentials, experience, expertise and trustworthiness of a potential business partner in Canada is relatively easy compared with carrying out the same due diligence abroad. Mr. Wright advises conducting sufficient research – possibly with the help of local lawyers or consultants – to ensure that prospective partners operate within acceptable human rights standards, are not corrupt, are not facing litigation and do not represent a potential political liability. Working with a partner who is on the wrong side of a dictator or autocratic regime can be a recipe for business disaster.

Consider hiring physical protection

"It depends on the country, but you often require on-the-ground physical security to protect your assets if the local police service isn't sufficient," Mr. Wright says.

Stay abreast of local developments

Situations in foreign countries can change quickly, Mr. Wright reminds, underlining the need to monitor local media for developments such as political upheavals or geopolitical situations that could transform business conditions in that country. Civil wars or economic crises in neighbouring countries are just two examples.