Mitigating political risk - advice from the experts

Bonnie Chow, Zurich

“The intent of a political risk insurance product is to protect a client’s balance sheet in the event that a catastrophic political peril happens – whether it be through a government expropriating assets or through political violence, like the current situation in Ukraine, for example. It’s to give the shareholders, the board, or the business owners, protection of the balance of their equity interests.

“The key thing for our product is that [a claim event] has got to be politically motivated. So if there’s looting or theft where the cause of it wasn’t politically motivated, that’s not something that we would normally cover. In fact, a lot of those things should be covered in a property policy, or, to an extent, a liability policy depending on the client’s industry.

“We are also seeing more companies coming to us and saying that land owners are pushing them out and requesting we broaden our coverage to allow for some of these events to be covered under our policy.

“Political risk insurance cover can be quite broad if the client actually knows what events they want to be covered and there is political motivation behind these events

 

Mark Wong, JLT

“Political risk insurance is a discretionary product in which different investors or corporates may view the risk differently. We need to understand where the investor is coming from as they may attract different types of political risk based on where they come from. [For example], western investors are at a higher political risk as opposed to a south east Asian investor with relation to a project in the Middle East.

“In comparison to property and casualty, political risk is a relatively new [insurance] product. It started off being a public sector product as far back as WWI and WWII where you had the rebuilding of Europe.

“From a private market perspective, there has been a strong development of the product. It started off with three or four players about 40 years ago and today you have about 50 different markets that provide political risk insurance, with the likes of AIG, ACE, Zurich and some of the Lloyds’ market, getting involved.

“With that, you have expansion of cover in relation to providing more defined perils. We now have things like inability to export, license cancellations, arbitration, and award default covers, which are add-ons to previous political risk products that were offered to the market.”

 

 

Jason Rance, Control Risks

“As with any dynamic market, there will be winners and losers [in China]. For western multinationals, those that take a proactive approach to managing these political risks will be at a natural competitive advantage to those that take a passive approach and become victims of the process.

“You can do a lot to understand what are the political risks and ramifications for your business. But you can also do a lot to proactively mitigate those risks.

“The more enlightened of our clients take a very proactive approach to identifying and managing their political risks. Over the mid-term that will give them a big advantage as they get to grips with a very fluid regulatory environment and they start taking a different approach to how they look at and evaluate new business opportunities and actively factor in regulatory risk to their business plans.

“It’s those enlightened companies that will naturally be in a better position than those who just shut their eyes and hope for the best or presume that they can do business in the same way as they did five years ago.”

 

 

Lee Garvey, Marsh

“When a company is making an investment [in a new country or territory] there are a numerous factors that they need to consider and some of that will be political risk and some of that will be commercial risk. What political risk insurers are looking to do is say: we can’t cover everything – we’re not providing a clear-cut backstop for an investment or a guarantee of the commercial viability of an investment – but we can help to manage clearly defined and specific political risks that the investment may face.

“Its important that the insurance market, to some extent, adapts to their clients’ needs. We are seeing insurers look at countries and territories that previously they may have otherwise not considered.

“In Asia, we’re seeing clients place a lot of focus on places like Myanmar, Vietnam and Indonesia. For the market here, these are key markets. We are seeing insurers take a greater interest and actually get a better on-the-ground feel for some of these countries and I think opening up and considering some of these new territories potentially helps some of our clients as well.”