Demand for sovereign debt insurance grows as costs rise: Chaucer

Rates for contract frustration insurance are on the rise as concerns grow that cash-strapped governments are increasingly at risk of defaulting on payments or cancelling commercial contracts, according to Chaucer. “Like for like premiums are up around 20-25% from 2022. A one-notch downgrade on a country across all rating agencies could see around +20-40% in pricing (all else equal),” the insurer explained. Rates are now likely to spike as an increasing number of countries see their sovereign debt downgraded, Chaucer said. Neil Edwards, deputy head of political risks and credit at the insurer, said: “A combination of global uncertainty starting from Covid-19, continuing through Russia/Ukraine and now Israel/Gaza, combined with the sharp rise in global interest rates and incidents of default in countries such as Ghana, has seen pricing increase across the board for all countries.” In analysis of major rating agency actions, speciality insurer Chaucer found that sovereign debt worldwide was downgraded 43 times in the last year, raising concerns from companies about the security of contracts and payments. Chaucer said government debt amid rising global interest rates and high inflation sit behind the downgrades and drive concern about the ability of countries to pay debt. The US, France, Argentina, Tunisia and Bolivia were among the countries to have their government bonds downgraded in the year to the end of October, Chaucer said. It explained that governments with large amounts of dollar-denominated debt are “in an even more perilous position”. “The rise in interest rates make it harder for governments to service their debts as they are having to pay higher coupons on new bonds and higher payments on index-linked bonds – that can lead to an increased risk of default,” Chaucer said. Jonathan Bint, senior analyst and underwriter at Chaucer, said businesses with government contracts are at risk when governments come under financial pressure. “As a result of this uncertainty, businesses are increasingly seeking to mitigate the risk of contract cancellations by governments and state-owned entities by ensuring they have a safety net. Contract frustration insurance is thus a way for businesses to shield themselves from resulting losses,” Bint said. Bint added that insurance buyers are increasingly seeking cover for a wider range of countries as they become more nervous about exposure to government contracts. “There is far more interest in contract frustration insurance in countries around the BBB credit range. This was not the case even five years ago as these are regions that have traditionally been considered as being stable,” Bint said. Edwards said demand for contract frustration insurance has increased in eastern Europe, driven by banks buying sovereign cover that they had not traditionally bought. “Prime examples for us this year would be Estonia, Serbia and Poland, where proximity to Russia has resulted in clients looking to cover exposure there,” Edwards said. “As sovereign downgrades take effect, this can also very much raise demand. This is illustrated by Colombia, which lost its investment grade rating, which saw a large influx of deals come into our market for cover,” he added. Demand for contract frustration insurance is particular strong for infrastructure projects in emerging markets, while political instability in western and central Africa has “unnerved” businesses with operations in the region, Bint said. “Businesses find it particularly uncomfortable when there is a high risk of regime change in regions that they operate in. When control is shifting around between governments, the risk of contracts being cancelled increases,” he added. Bint revealed that buyers are also seeking contract frustration insurance for projects in mid-size economies, usually considered to be safe investments. “As the global economic outlook deteriorates, businesses caution over cancelled contracts is extending far beyond just emerging markets,” he said.

Demand for sovereign debt insurance grows as costs rise: Chaucer

Risk of government default is driving buyers to seek cover in ‘stable’ countries

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