Strong Capacity Drives Buyer’s Market in Political Risk Insurance: Marsh

Abundant capacity and strong competition have contributed to a favorable marketplace for buyers of political risk insurance globally, according to Marsh’s “Political Risk Market Update,” published this month.

Despite growing concerns about global political and credit risks and a recent increase in loss notifications, which will likely lead to some losses later this year, insurers generally view political risk as an attractive line of business, the political risk report said.

“And with pricing at an all-time low, multinational companies are increasingly purchasing political risk insurance to protect shareholder value, support growth in foreign markets, and help secure financing from lenders,” said Marsh in the report.

Growing Capacity

Capacity in the political risk marketplace has been growing steadily over the past 10 years, the report said, noting that global capacity now exceeds US$2 billion for a single policy, which has nearly doubled in just six years.

This increased capacity reflects a shift away from traditional property and casualty lines toward more profitable specialist classes of insurance, Marsh said.

The report explained that many traditional insurance lines (such as directors and officers) have become crowded with competitors, which is a major factor in soft market pricing and limited underwriting profits, Marsh said.

In addition, low interest rates are hitting insurers’ investment income, which has led them to find new sources of revenue in specialty lines such as political risk insurance, which do not correlate with swings in the overall commercial insurance market.

The recent merger of XL Group and Catlin Group is an indication of the industry’s growing interest in specialty lines, Marsh said, quoting the two companies which said the merger would allow them to “add immediate scale in specialty insurance.”

The industry also continues to add underwriting resources in political risk. For example, the report said, Tokio Marine Kiln recently announced it had hired a trade credit and political risk specialist for Asia, while Lloyd’s and Beazley have also opened new offices in Dubai with a focus on political risk and other specialties.

Positive Outlook for Political Risk

While combined ratios for political risk have generally remained below 100 for the past decade (with the exception of 2008 and 2009 at the height of the global financial crisis), insurers in recent months have seen an increase in the frequency and severity of loss notifications.

These losses were generated in high-risk countries such as Libya and Ukraine and span a number of risks, including nonpayment, physical damage, forced abandonment, and currency controls, the report continued.

Nevertheless, Marsh said, the industry’s outlook for political risk remains positive.

“The global political risk landscape continues to be shaped by falling oil prices, geopolitical tensions, and regime change, whether as a result of constitutional elections or otherwise,” said Evan Freely, Marsh’s Global Credit & Political Risk Practice leader, who was quoted in the report.

“But these trends have not yet translated into catastrophic losses for insurers. Combined with the lack of profitability in more traditional insurance markets, this has led many insurers to essentially ‘double down’ on their investments in political risk,” Freely said.

Multi-Country Cover

“Although insureds can pick and choose specific countries to insure, political risk can often emerge in unexpected places,” Freely said. “For this reason, most companies are now purchasing multi-country political risk insurance policies instead of single-country policies.”

Multi-country policies can provide coverage for a specific region, such as the Middle East and North Africa, or a longer list of countries specified by an insured, the report explained.

Purchasing a multi-country policy may also allow companies to insure countries where coverage is often difficult to secure or expensive on a single-country basis, including Argentina, Libya, Mali, Myanmar, Pakistan, Russia, Ukraine, Sudan, South Sudan, Syria and Venezuela.

Insurers prefer multi-country policies because they signal that insureds are not attempting to adversely select high-risk countries for coverage, Marsh said.

“As a result, these policies are often available with more favorable terms and conditions than single-country policies. Coverage can also be customized to cover a broad range of risks, including political violence, expropriation, currency inconvertibility, non-payment, and contract frustration,” according to the report.

Captives and Political Risk

At the same time, multinational companies are increasingly self-insuring their political risk exposures through their captive insurance companies.

The number of captives writing political risk insurance coverage nearly doubled from 2013 to 2014, according to The World of Captives: Growth and Opportunities Without Borders, Marsh’s annual benchmarking report on captive insurance.

“Although self-insurance can offer several benefits, political risk losses can be catastrophic,” the report said, warning that the cost of paying just one claim for expropriation of assets could leave a captive insolvent unless it is well capitalized.

Insureds should think carefully about using a captive to underwrite political risk – especially given the current favorable conditions in the commercial marketplace, according to Marsh in the report.

Source: Marsh

Topics Carriers Profit Loss