ACE Europe Global Markets Study Highlights Political Risk Concerns

February 1, 2007

According to a new report the Economist Intelligence Unit (EIU), sponsored by ACE, “nearly 30 percent of senior executives and risk professionals surveyed said their companies had been forced to cancel existing investments in emerging markets because of concerns about political risks.”

The report is the latest in a series of research studies, sponsored by the ACE European Group and its specialty Global Markets division. It stresses the “need to adopt formal structures to assess the ongoing risks posed by political instability and unrest in emerging markets,” if businesses “are to protect their growing investment in these areas.”

ACE said that it believes the failures to do so “points to a potential gap in the risk assessment process both in terms of an understanding of the risks and the level of ongoing risk management these companies make for existing investments.

“For most companies, risk management is concentrated on the period when an investment opportunity is being considered,” ACE’s bulletin continued. “80 percent of respondents said they consider political and operating risk as part of the due diligence process. However, only 44 percent revealed they monitor and manage risk on a continuous basis once the investment has been made. “

Commenting on the report’s findings, Julian Edwards, Head of Political Risk at ACE Global Markets, stated: “Emerging markets remain highly volatile but with these risks comes clear investment rewards. However, without formal processes businesses face potential exposure to unnecessary and additional risks which can impact directly on the performance of their investment and, in some circumstances, lead to cancellation.”

The report found that “over half of those surveyed said the risks associated with investing in emerging markets have increased in the past three years and in response many companies are increasing the time and resources dedicated to risk management.

“The survey also showed that stability of political regimes was the one of the most significant threats to operations in emerging markets. In the past three years, the vast majority of companies that already invest in emerging markets (79 percent) deepened their investment over the period. 64 percent reported that rewards have increased.”

Edwards noted: “The results of the global risk briefing clearly shows the growing appetite for extending investment in emerging markets. But, with less than half of those surveyed performing ongoing risk assessment as part of their investment program the pace of growth and the potential returns could be affected. There is no doubt that maintaining a structured approach to risk management is crucial.”

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