For decades, investors and insurers spoke of political risk—the possibility that government actions might impair investments or disrupt operations. The concept was well understood, the insurance products mature, the frameworks familiar. Then, almost imperceptibly, the terminology shifted. Today, everyone speaks of geopolitical risk. The prefix matters more than it might appear.
Political risk, as traditionally conceived, was essentially a domestic affair. The U.S. Overseas Private Investment Corporation (OPIC), established in 1969, defined it simply: the possibility that political decisions in a country will affect the business climate such that investors lose money. The risks were concrete—expropriation, currency inconvertibility, political violence.
This framework served investors well. Multinational corporations could purchase insurance against nationalisation, assess regulatory risk country-by-country, and build political risk premiums into their discount rates. The World Bank’s Multilateral Investment Guarantee Agency, established in 1988, institutionalised these approaches multilaterally. The market worked.
The implicit assumption was that political risks were fundamentally local. Even during superpower confrontation, businesses could treat international tensions as background noise—manageable through geographic diversification and appropriate coverage. You could buy your way out of political risk.
The Rehabilitation of a Tainted Term
“Geopolitics” itself carries historical baggage explaining its delayed adoption in finance. Rudolf Kjellén coined the term around 1900; it gained prominence through Halford Mackinder’s theories and, more darkly, through association with Nazi expansionism. After 1945, the word became professionally toxic.
Henry Kissinger rehabilitated geopolitical thinking in the 1970s for foreign policy circles. But here lies an instructive irony: strategists embraced geopolitics decades before the financial community caught up. Bankers remained wedded to political risk frameworks while diplomats had moved on. The conceptual lag would prove costly.
The Structural Break
The Caldara-Iacoviello Geopolitical Risk Index, developed at the Federal Reserve, reveals something striking. The index spikes predictably around major events—the Gulf Wars, the Cuban Missile Crisis. But after September 2001, something different happens: the baseline shifts permanently upward. Risk doesn’t return to pre-attack levels.
This wasn’t merely about terrorism. September 11 shattered the assumption that political risks could be geographically contained. A plot hatched in Afghanistan, funded through Gulf networks, executed by men who had lived in Hamburg, killed thousands in New York. There was no longer any “over there” where risks could be quarantined.
The 2010s Watershed
The definitive shift accelerated after the 2008 financial crisis. Several developments converged.
First, the “peace dividend” ended. The U.S.-led order that peaked around 2010 gave way to great power competition. China’s rise, Russia’s assertiveness, American retrenchment created a contested environment. The assumption that major powers would compete economically but cooperate on security no longer held.
Second, COVID-19 exposed how interconnection created systemic fragility. A factory fire in Japan, a port closure in China, semiconductor shortages in Taiwan—all cascaded globally. Political risks in one jurisdiction carried consequences no insurance policy could cover.
Third, economic interdependence became weaponised. Trade policy became security policy. Financial sanctions became instruments capable of excluding entire nations from the dollar system. The boundaries between economic and security domains dissolved.
This killed “economic attachment”—the assumption that commercial ties pacify international relations. Russia’s invasion of Ukraine, despite Europe’s energy dependence on Russian gas, delivered the final refutation. Interdependence didn’t prevent conflict; it merely changed the weapons.
What the Prefix Changes
The “geo” fundamentally reframes the risk. Political risk was about governments behaving badly toward investors. Geopolitical risk is about the structure of international power itself becoming unstable.
Political risk could be managed through country selection, contractual protections, and insurance. You assessed Egypt or Indonesia, priced the risk, and proceeded with coverage or walked away. The unit of analysis was the nation-state.
Geopolitical risk demands attention to alliance structures, trade dependencies, technology access, and institutional resilience. A European manufacturer’s Taiwan Strait exposure cannot be managed by avoiding Taiwanese suppliers. The risk propagates through semiconductor supply chains touching every industry, shipping lanes carrying global commerce, financial markets that would convulse at confrontation, and sanctions regimes forcing impossible choices. The risk is genuinely geo-political—written into the geography of global production.
No insurance policy covers this. The exposure is systemic, and systemic risks cannot be transferred—only absorbed.
From Fixed Commitments to Strategic Options
The most profound implication lies in how actors respond to uncertainty.
Under political risk, commitments were fixed. Alliances were permanent. Investment decisions implied long-term presence. The response was due diligence before commitment, insurance after, patience throughout.
Under geopolitical risk, fixed commitments become liabilities. States and corporations increasingly treat relationships as options—contingent claims that can be exercised, delayed, or abandoned as conditions evolve.
Financial option theory illuminates otherwise puzzling behaviours. Why maintain alliance commitments during uncertainty? Because options become more valuable as volatility rises. Why do middle powers like India and Turkey cultivate relationships with competing blocs? A portfolio of diplomatic options provides flexibility that exclusive alignment forecloses. Why build redundant supply chains at significant cost? Optionality commands a premium in uncertain times.
Traditional alliances built on irrevocable commitments face stress as members seek flexibility. Loose groupings like BRICS gain appeal precisely because they offer optionality without binding obligation. “Strategic autonomy” has become ubiquitous because it captures what states now value: preserved options in a world where exercising them may become necessary without warning.
The Limits of Insurance
Political risk insurance remains valuable for discrete, country-specific risks. A mining company in an unstable jurisdiction should obtain coverage.
But you cannot insure against a bifurcated technology ecosystem forcing choices between Chinese and Western standards. You cannot hedge against WTO collapse. There is no policy covering the risk that your primary market and primary supplier end up on opposite sides of a new Cold War.
Some geopolitical risks are uninsurable—either systemic or challenging the frameworks within which insurance operates. Political risk assumed a stable order within which national aberrations occurred. Insurers could price deviations because the norm was clear. Geopolitical risk acknowledges the order itself is contested. When the baseline shifts, there is no reference point against which to price coverage.
The Path Forward
The practical challenge is developing frameworks appropriate to systemic competition.
This requires moving beyond country-by-country assessment to understanding networks of vulnerability. The question becomes not “how risky is Taiwan?” but “how exposed is my portfolio to Taiwan-related disruption, wherever assets are located?”
It demands scenario planning for unprecedented outcomes rather than historical extrapolation. Stress testing must encompass possibilities without precedent—financial fragmentation, technology decoupling, simultaneous conflicts across theatres.
It necessitates building resilience rather than relying on risk transfer. Redundant supply chains, diversified markets, strong balance sheets matter more than clever hedging when hedges themselves may fail.
Most importantly, it requires epistemic humility. Models trained on thick globalisation may mislead during transition. The most dangerous assumption is understanding the new regime while it still takes shape.
Conclusion
The revolution from political to geopolitical risk marks a fundamental recalibration. Political risk was local weather—storms striking particular countries, forecastable and insurable. Geopolitical risk is climate change—transformation of the entire system altering probability distributions everywhere simultaneously.
The “geo” prefix reminds us that in an interconnected world, there may be no safe ground from which to observe others’ troubles. The earth itself—our shared geography of production, trade, and finance—is the terrain on which risks materialise.
The peace dividend is over. Economic attachment as security guarantor has ended. Tools adequate when political risk was local and insurable may fail when geopolitical risk is systemic and must be absorbed.
We are not witnessing temporary disruption until normality returns. We are living through structural transformation demanding new mental models and new approaches to resilience. The shift from political to geopolitical risk is not merely vocabulary. It is a change in the world.
Summary: Political Risk vs. Geopolitical Risk
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