War, riots, coups, embargoes — the sort of political upheaval that once occupied statesmen, mercenaries and spies is these days also the concern of less swashbuckling figures in the world of finance. A band of corporate-risk officers, export managers and international bankers are looking to insurers to shield them from the financial consequences of political turmoil around the world.
Such cover would once have appealed only to the most intrepid enterprises: oil firms prospecting in the Niger Delta, or mining operations in dodgy corners of central Asia. But as companies push their business into ever more remote locales, so they have sought protection against more exotic risks. The dangers of politics now hang over companies as diverse as fruit growers in Latin America, film producers in Fiji and bankers in Dubai.
The Berne Union, a group that includes the 30 biggest public and private insurers in the field, says its members have over $113 billion in policies outstanding. Last year they wrote more than $44 billion in coverage, up from $37 billion in 2005.
So where do the risks lie? The answer bobs and drifts with the political currents. But there are also some fixed landmarks: Afghanistan, Equatorial Guinea, Tajikistan, Syria and Iraq are at the top of a risk league-table published recently by Aon, a big broker. It is no shock to find Colombia, Angola and Venezuela on the next tier either. More surprising perhaps are the potential dangers ascribed to Vietnam, Panama and Ukraine. But when such risks cease to be surprising — ie, when a crisis suddenly erupts — it is often too late to get cover. “The phone starts ringing as soon as it has happened,” sighs Charles Keville of Aon’s crisis-management group.
Traditionally, the insurance on offer has covered political violence (war, insurrection and such), nationalisation and expropriation of assets and currency inconvertibility. These threats can undercut entire investment projects — a hotel may be vacated in the wake of a military coup, for example — as well as specific contractual agreements, such as a big export order. The benefit of political-risk cover is most evident when firms have long-term commitments in emerging markets: in project-finance loans, for instance, risk guarantees can reduce costs.
In recent years, however, the industry has experienced upheavals of its own. Three in particular: innovation in offerings, a greater role for private insurers, and a narrower focus for some of the public insurers that used to bestride the field.
Innovation has been fostered partly by clients seeking new forms of cover. Banks, for instance, now frequently seek insurance against governments or foreign entities failing to honour contracts for political reasons. They may have made a big loan to an infrastructure project, which the government might seek to expropriate, for example. Such cover accounts for half the political-risk policies written by some underwriters. Sovereign Risk Insurance, a Bermuda-based specialist insurer founded in 1997, is in 114 emerging markets and is particularly active in this area. One of its contracts is a seven-year, $95m policy backing a foreign bank’s structured-finance business in Brazil.
Fresh products are also the result of new, private suppliers. In addition to Sovereign, a clutch of specialist underwriters has emerged in the past decade. They join more established insurers like AIG, Chubb and a cluster of syndicates at Lloyd’s of London. Private providers now account for about half of a market that used to be dominated by big public underwriters, such as national export-development agencies and the World Bank’s Multilateral Investment Guarantee Agency (MIGA).
As the private sector has grown, these public underwriters have found new roles for themselves, either by choice or necessity. Although some of the national agencies, Japan’s, for example, are free to set low prices and write vast amounts of insurance cover, others are required to be self-supporting. This is the case for the Overseas Private Development Corporation (OPIC), an American agency. OPIC has cut back its role in big insurance projects in recent years, deferring to the private sector. It now focuses on investments in emerging markets that fit America’s foreign-policy priorities.
MIGA, too, is trying to plug the gaps in the market left by private insurers. It attends to countries like Burundi or Sierra Leone that do not attract much private interest. It has also insured a number of “South-South” projects, such as South African investments in sub-Saharan Africa.
Narrower than they were, the public insurer is far from obsolete. Public providers of political-risk cover have some notable advantages over private insurers. Government connections make a difference when things go pear-shaped: a MIGA official says that of more than 850 contracts written in the past two decades (worth more than $16 billion), it has had to pay only three claims. Most of the 10-15 disputes it sees each year are resolved between the insured party and the host government.
Public insurers can also typically write longer contracts than their private counterparts dare to offer. Such contracts deprive insurers of the opportunity to recalibrate risks. Unlike the underwriters who declined to renew annual homeowners’ policies in hurricane-prone Florida, political-risk insurers are locked into agreements for up to 20 years. If things go wrong over a long period, their pay-outs could be huge.
Between them, public and private insurers now rub shoulders in a field that was once rather lonely. In a world of abundant liquidity, they must also compete with investors of all kinds who, in their hunger for yield, are willing to take a bet on politically vulnerable enterprises. Many companies involved in project-finance deals can easily borrow enough to self-insure their projects rather than buying insurance elsewhere. Paradoxically, the danger facing those who insure against political peril is that the appetite for risk in financial markets is so strong.
And yet some customer needs remain unmet. Foremost among these is worry about dramatic falls in currencies. Although derivatives can hedge such risks several years ahead, they cannot offer the long-term cover many investors require. Several learned this to their cost when Argentina’s currency was devalued in 2002. The policies they thought would cover their losses proved useless. Whether you are insuring against a breakdown of the social fabric or a breakdown in your car, you should always read the fine print.