Political risk insurance evolves to meet growing demand

The growing number of political and societal risks is one of the biggest concerns for any multinational business. Exposures are increasing and companies want global programmes that can provide comprehensive cover around the world.

“This is a time of an almost extraordinary level of volatility worldwide,” said Julian Edwards, head of political risk & credit for Chubb Global Markets. “On one hand you have issues of wider international or regional importance, like the situation in the South China Sea, Brexit, the volatility in commodity prices or even the result of the US presidential election, combined with a host of country-specific issues in places like Brazil, Turkey, Colombia and Nigeria,” he said. “There are of course countries that have ongoing crises like Syria, Libya and Ukraine.”

An added issue is what Lloyd’s, in a recent report, called “pandemics” of political violence, where individual outbreaks of unrest trigger similar events across the world causing a contagion effect. Lloyd’s said the Arab Spring exemplified a political violence pandemic, as did the wave of violent jihadist extremism that followed in its wake. Lloyd’s said political violence contagion has been a consistent feature of the international system since at least the 1960s, but instances have become more frequent, and the contagion effect ever more rapid and impactful.

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All of this has resulted in a definite increase of enquiries about political risk insurance from businesses. “There is certainly a growing interest in the product as a result of increased awareness of political risk,” said Sam Ouin, assistant vice president, EMEA, political risk, AIG. “Current geopolitical tensions play into that. Recent events, such as Ukraine, Syria, Brexit, the commodities slump and the stuttering global economy, not to mention the upcoming US presidential election, all generate concern and uncertainty and we have seen an uptick in enquiries for cover from both banking and corporate clients. There has also been an increase in demand for previous “safe havens” (eg Oman) and for developed countries.”

Mr Ouin noted that the recent Ferma survey showed that political risk has increased, with “Political, country instability” at number three in the Top Ten risks highlighted in the survey of European risk managers.

David Anderson, head of credit & political risk at Zurich Insurance Group, said that the rise in geopolitical tension has definitely made political risk a board-level discussion point for many corporations, but he explained this does not always translate into increased demand for political risk insurance because global trade and investment flows are down.

Political risk cover has greatly evolved over the last years, according to Chubb’s Julian Edwards. “Companies that have operations abroad and/or base their growth on exports, can now have cover for a wide range of risks including for confiscation, expropriation, nationalisation and deprivation, exchange transfer risk, forced divestiture, import/export licence cancellation or embargo, operating licence cancellation as well as war and political violence and any business interruption that can result,” he said.

All the insurers point to an increase in claims as a result of the greater volatility, particularly in countries like Ukraine, Yemen, and Libya, related to political violence and forced abandonment.

In spite of a large amount of claims activity and challenging underwriting conditions, said Chubb’s Mr Edwards, the market has record amounts of capacity available. “For example, we estimate that, in theory, there is more than $5bn available for expropriation risk and government non-payment, roughly split in half between the two,” he said, adding that these market conditions put pricing under pressure.

“There is theoretically well over $2bn of capacity available for any given project in the private insurance market,” said Zurich’s Mr Anderson. “But that will be constrained by the particular country, policy period required, and underwriting appetite for the project. Pricing for the industry has been fairly stable over time but there are currently a number of countries with active claims or payment delays where appetite may be very thin or pricing very high. Prolonged low commodity prices are playing a role here.”

AIG’s Mr Ouin said the market has grown exponentially recently with over 50 markets writing political risk insurance: “It’s fair to say it’s a buyer’s market right now, given the levels of capacity available, so pricing can be competitive. That said pricing for distressed or tricky countries is holding up for obvious reasons.”

There has been a growing trend for multinationals moving in favour of multi-country political risk insurance policies instead of single-country policies, especially in the manufacturing sector, according to Mr Edwards. “Companies prefer multi-country political risk insurance because it is more cost effective for them, given the amount of assets they can cover, and also because it’s a comprehensive solution, as no asset is left out. This is especially valuable given the recent uncertainty in Ukraine and Turkey,” he said.

Mr Anderson said most multinationals tend to opt for multi-country policies because they recognise that predicting where and how they will take a political risk loss is difficult. However, he said that mining and oil/gas companies investing in particular projects tend to purchase on a project-by-project basis, based on their risk analysis.

Mr Ouin isn’t convinced there has been a particular shift here, although he acknowledges that there has maybe been a general uptick in enquiries for multi-country programmes from clients who are new to the political risk market and where more than 50% of revenues are derived outside their ‘home markets’.

“Multinationals would normally request cover for the more difficult countries in their portfolio but insurers look more favourably on a good spread of risk, one that includes both the tricky and the less tricky countries,” said Mr Ouin. “A good spread of countries can impact pricing positively. Further discounts can be achieved through structuring of the programme via first loss limits and significant levels of self-insured retention or deductibles.”