Political risk insurance: a buyers’ market

The marketplace for political risk insurance is better than ever before: capacity is in abundance, competition is high and claims are relatively low, despite the ever-present unpredictability of many emerging economies. In a soft market, clients are also securing broader coverage at the same competitive rates. Yet, despite all of this, take-up of political risk insurance remains relatively low.

According to the StrategicRISK political risk survey, only 20% of Asia-Pacific firms use political risk insurance to mitigate their exposure. Instead, the vast majority are opting for joint ventures or collaborations with local government organisations to mitigate their risk.

Scentre chief risk officer Eammon Cunningham explains that “[political risk] insurance, while welcome, may not truly compensate you if your business in a particular country ‘fails’ to deliver the results expected.

“Forecasting political risk is an imprecise science,” he adds.

But the insurance market is working hard to change this perception.

‘Abundant capacity’

Political risk insurance as a product has been around for about 40 years, with the original buyers being exporters and corporates. Since then the market of both buyers and insurers has evolved significantly.

Today, capacity for political risk insurance now exceeds $2bn for a single policy - nearly double the available capacity just six years ago, according to Marsh’s latest Political Risk Market Update, which reviews the political risk insurance market globally.

“Abundant capacity and strong competition have contributed to a generally favorable marketplace for buyers of political risk insurance globally,” the report says.

“Despite growing concerns about global political and credit risks and a recent increase in loss notifications — which will likely translate into some losses for insurers later this year — insurers generally view political risk as an attractive line of business in which to compete.

“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.”

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), which indicates profitable underwriting results.

So while overall take-up remains still low, it is a commonplace purchase for certain industries and countries.

Self-insurance is also an increasingly common option for multinationals when it comes to mitigating political risk exposures. The number of captive insurers writing political risk insurance coverage nearly doubled from 2013 to 2014, according to Marsh’s The World of Captives: Growth and Opportunities Without Borders report.

Scope of cover

Zurich Asia-Pacific deputy regional manager Bonnie Chow says 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.

“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,” she says. 

“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.”

Zurich says its claims experience in recent years has tilted strongly toward political risks as opposed to credit risks.

The insurer has seen an increase in a specific group of political risk claims, including the non-honoring of state-owned-enterprise payment obligations, political violence, and forced abandonment.

Misconceptions

Brokers that StrategicRISK spoke to agree that there are some common misconceptions when it comes to political risk insurance.

For example, clients often believe the product is for business interruption, says JLT Asia managing director – credit, political and security risks Mark Wong.

“The product is intended to cover a cessation of activities where the investor has been a victim of a political risk event and generally they have to decide if they want to exit the investment,” Wong explains. “Usually in those cases the insurer will need to take over the project. So there will be an assignment of the shares of the company in which the insurer has to take over and the investor will have to exit the investment if they are looking to get compensation.”

Marsh head of lenders solutions group – Asia/structured trade credit and political risks Lee Garvey adds that clients need to be clear on the limitations and purpose of a policy.

“[Political risk] insurance can be viewed as a way to help to minimise risk for those key, definable political risk events, but it’s not going to be there as a back-stop for an investment or a guarantee of profitability.

“It should also be viewed as a business facilitation tool, rather than as a cost to the business,” he adds.

More marketing needed

Awareness of the product is also an issue that brokers and insurers need to address.

Roland Teo, head of risk management in a Singapore public healthcare group and council member of the Risk and Insurance Management Association of Singapore, says many firms may not be aware of how political risk insurance can help mitigate their exposure.

“To gain better traction in helping more firms recognise this need, the insurance industry has to reach out to firms through neutral platforms. Good platforms would be independent bodies such as trade and professional associations, related government agencies and academics,” he says.

Lockton Asia-Pacific director and head of political and credit risks Mark Thomas agrees that the insurance industry needs to do more to promote itself when it comes to political risk.

“Political risks insurance is still a very new or virtually unknown product to many businesses in Asia-Pacific,” Thomas says. “We still meet companies where political risk insurance has not been investigated or used before. The industry has gone a long way to meet the needs of its clients and more awareness of the product and its advantages to all types of businesses is essential.”