Business must prioritise political risk management as we head into a bumper election year

Political risk should be top of mind for businesses as 2024 shapes up to be a bumper year for elections.

This may lead to a steady increase in demand for political risk insurance products as organisations look to protect themselves from the associated threats.

The total number of national elections will increase by 14% next year, from 56 globally in 2023 to 64 in 2024, according to research by global specialty (re)insurance group Chaucer.

Jonathan Bint, senior underwriter and analyst at Chaucer points to elections in the US and South Africa being particularly important, noting that the former is always critical due to its size.

Countries with elections in 2023 had a combined GDP of $9.89tn. This will more than fourfold increase to a combined GDP of $40.79tn in 2024, according to World Bank data.

This increase in combined GDP represents a jump from 9.8% to 40.6% of the world’s GDP going to the polls next year.

Understanding the risk implications

The increase in elections and the size of the economies at stake presents an increased political risk for businesses operating in countries that face political uncertainty.

When governments are struggling to pay their bills, this can increase the risk that businesses find their public sector contracts are suddenly cancelled or go unpaid.

The post-2008 period has proved fertile ground for economic radicals on all sides of the political spectrum, and their successes have put many government suppliers’ portfolios in jeopardy.

Recent episodes of mob violence following the 2020 US presidential election and the 2022 Brazilian presidential election highlighted the risks businesses face in election years – underlining the need for insurance policies to protect their assets.

Another common fear for risk managers is whether a potential government may be less willing to pay its creditors.

”2024 could be a year of significant political change which we believe could lead to political risk insurance being pushed further up the boardroom agenda.”

The prospect of a government open to defaulting on its debts leaves those with money at stake with little option but to secure political risk cover to protect their interests.

For instance, political risk cover saw a recent surge in interest during the Argentinian presidential primaries. 

Javier Milei’s shock win on August 13 created a barrage of financial and economic shocks, including currency devaluation, increased interest rates and shocks to Argentinian bonds.

The election initially led to an 18% devaluation of the Argentine Peso. Argentina’s central bank responded by raising the interest rate 21 points to 118% as a result. Argentina’s sovereign bonds initially dropped six points.

Bint said: “Not only are more elections taking place next year than this year, but crucially these elections will affect key major economies around the world. 2024 could be a year of significant political change which we believe could lead to political risk insurance being pushed further up the boardroom agenda.”

Tackling the threats 

As a result of the heightened political risks, contract frustration insurance is seeing an uptick in demand as businesses look to mitigate these threats. 

Government contract cancellations also spike in frequency after a change in government, so an increase in elections – itself increasing the likelihood of government change - will also be driving up demand for contract frustration cover.

Bint says: “Organisations from governmental outsourcers to major state creditors should be looking at which of these elections they are exposed to.

”Political risk is an inherent feature of the democratic process.”

”Those who don’t currently have cover should speak to specialists about how to manage the risks involved in political change.

“We’ve seen how volatile markets become when political candidates with unorthodox economic policies look likely to win.

”Political risk is an inherent feature of the democratic process. Political risk cover exists to help businesses handle this volatility, knowing that their own risk profile is manageable.”