Except for Egypt, political risk insurance has been growing
Tourism, manufacturing and resources companies surveying an unpredictable world are increasingly having to consider insurance against political risks, and the insurance industry is gearing up to provide more cover.
The small print of a regular insurance policy of course excludes damage resulting from war and insurrections, but given the rise in global risks it’s no surprise insurers scent a lucrative chance to fill the gap.
Companies can buy a range of policies to protect their factories, hotels or mines from expropriation and political violence, typically in developing countries, although European risks are not off the radar.
Kit Brownlees, a political risk specialist at insurance brokerage Arthur J Gallagher & Co. in London, said he’s seen a rise in inquiries from clients for insurance against arbitrary increases in taxes on bank accounts recently.
“They are looking for protection against confiscation of the assets in bank accounts, or against a punitive tax, which is another form of confiscation,” Brownlees said.
Some longer-term trends are also underpinning growth in this opaque branch of the insurance industry.
For corporate CEOs and CFOs, showing they have taken action to protect their assets is integral to meeting higher standards of corporate governance, in force since the financial crisis, and avoiding shareholder wrath.
“These decisions are taken at a very high level in the company,” said Nuria Gorog, head of credit and political risk at Zurich Insurance Group AG, a major player in political risk with a capacity of $150 million per transaction and cover of up to 15 years.
Corporate compliance departments have gotten stronger, while risk and financial officers want the full array of options to mitigate political risk before taking an investment decision.
“This is clear and it’s one reason why volumes are increasing more now than in the past,” Gorog said.
The EU is doing its bit, too. After the Cyprus bailout in March, EU finance ministers agreed on a plan to salvage troubled banks that would require depositors with more than $128,100 to share in the cost of saving a lender.
“Cyprus has raised a lot of question marks,” Brownlees said, adding it was doubtful cover could be arranged. “You’d have to be a pretty brave man to write that risk.”
Hard data on the size of the market is hard to come by, but there are signs more insurers are eyeing political risks.
“There is more capacity arriving in the market on a regular basis,” said Isabelle Girardet, head of the Transactional Cover Unit at Euler Hermes, adding that the market had grown by about 10 or 20 percent over the last five years.
The volume of newly insured values in the broader category of investment insurance – of which political risk covers a part – rose by 20 percent last year to $94 billion, according to the Berne Union group of trade and investment insurers. Total exposure in investment insurance rose more than 9 percent to $219 billion in 2012, Berne Union data show.
Once a threat becomes immediate, it can be nearly impossible to find cover. “You can’t insure a house that’s already on fire,” as an industry saying goes. Insurers have little appetite for Egypt, for instance.
Elsewhere the supply of insurance for political risks has been growing steadily, also helped by trends such as booming international investment in commodity extraction and increased transactions between emerging economies. Banks are increasingly demanding it as a condition to finance projects.
Data from Gallagher show available capacity for project risks at around $1.7 billion per risk in July, up 3.2 percent from the start of the year, after rising by 22 percent in 2012 and nearly 7 percent in 2011. Trade-related political risk capacity grew by the same amount so far this year, and by double digits in the last two years.
Some of the capacity boost comes from new entrants like Brit Group and Lloyd’s of London syndicates, but established political risk insurers are also taking on greater exposure.
Political risk insurance is expensive, typically measured in percentage terms rather than “per mill,” or a tenth of a percent, as are standard property/casualty policies.
“Downward pressure on returns at insurance companies as a consequence of low interest rates is prompting them to plough their money into specialties where there are better returns and political risk has been one of the beneficiaries of that,” said broker Andrew van den Born at Willis Group.
Claims are seen as low-frequency but high-severity, so the cost-benefit calculus can still be favorable to companies. “Political risk claims tend to be total, as opposed to partial, and claims in the millions or hundreds of millions of dollars are not unusual,” said Roger Schwartz at Aon Risk Solutions.
Collectively, political risk insurers have settled roughly $3 billion in claims since the start of the financial crisis, compared with annual premiums of about $1.3 to $1.5 billion, Willis estimates.
Companies or banks seeking cover for a power plant or mine can line up very large capacities – up to $2 billion per transaction if adding insurers like Zurich or AIG and Lloyd’s syndicates together – with each insurer taking a slice of the total.
Brokerage Marsh & McLennan Cos. Inc. has partnered with analytical firm Maplecroft to track 45 indexes of economic, social and political variables, using satellite imagery to map risks to company assets down to 100 meters in scale.
Talking about individual clients is taboo in the insurance industry, even more so with political risk. Yet corporate interest continues to be spurred by unpredictable high-profile cases, such as Argentina’s expropriation of Spanish oil major Repsol’s 51 percent stake in YPF, or the unrest in the Arab world.
“One takeaway from the Arab Spring is that there doesn’t have to be any overt action by the host government; political risks can stem from ‘soft’ risks, such as income disparities or food shortages,” Willis’s van den Born said.
“It also happened in places most people perceived as investor-friendly.”