Political risk: striking a balance

24 August 2018

Businesses, investors and banks today are operating in a febrile, hard to predict political risk environment, whereas for insurers it’s creating opportunities.

Garry Booth

Political risk isn’t new but against the background of a precariously balanced global economy and stubbornly low interest rates, businesses and their backers are more focused on it than ever before.

However, it’s proving to be an environment that insurers thrive in, according to Matthew Strong, CEO – Credit, Political and Security Risks at JLT Specialty: “The market has responded and there is a growing level of capacity and availability of political risk products to address the challenges corporates, financial institutions and trading houses are facing,” he says.

“It’s a healthy balance right now: supply and demand is working.”

The political risk insurance market used to be a relatively quiet corner of the risk business, mostly serving businesses that operate in high-growth economies characterised by fragile democracies.

Such businesses – and their investors – need to protect themselves from government actions that could harm their assets or concessions, for example.

Roddy Barnett, Focus Group Leader and Political Risk Underwriter at Beazley, agrees that the political risk insurance (PRI) market is heating up.

“Every year seems to see an uptick in serious political events since the start of the financial crisis and the onset of the Arab Spring.

“The past couple of years have been particularly eventful, what with the election of President Trump and more recently developments on the Korean Peninsula,” he says.

“The impact of these sort of events do stimulate an uptick in enquiries.”

Global political risks

But other economic forces are at work, Barnett adds, as the low interest rate environment leads institutional investors to look for attractive infrastructure projects in riskier parts of the world.

Ports, roads, mobile telephony and renewable energy projects are all in demand and share some of the classic perils associated with PRI, namely confiscation by the government, political violence, damage to assets and also breach of concession by the government.

“Pension fund managers are not seeing such good returns on infrastructure projects in the mature economies and are now looking further afield into high-growth economies.

Such projects have an over layer of political risk and so we have seen those sort of clients coming to our market for cover,” Barnett says.

“It’s a similar picture with lenders on such projects. In these cases, it’s either the borrower seeking cover on their own behalf, or at the request of the lender.”

Banks’ demand for insurance protection isn’t limited to pure political risk cover, however – credit, or ‘comprehensive non-payment’ insurance has also taken off in OECD markets.

Banks increasingly take advantage of the capital relief provided by insurance to allow them to keep growing their loan portfolios.

The trend has been boosted by the introduction of the Basel II and III capital regulations, whereby banks can take capital benefit so long as insurance cover is structured correctly.

[Crosshead] Newcomers to credit and political risk market

At a time when margins are under pressure in their other staple lines of insurance business, the renewed demand for such non-trade-related cover from banks has made the credit and political risk market even more attractive to insurers.

Existing suppliers have grown their capacity and maximum policy periods, but new players have come in as well. Around 60 insurers are active in the market today, compared with half that number ten years ago.

So many insurers have started up in the sector that it has created challenges for clients looking for the right risk partner.

Strong says: “The resource pool is stretched. You have to look at a team’s underwriting expertise, the management knowledge and their claims’ track record.

“It is a catastrophic line of business and we look very closely at the long-term commitment of insurers for clients – you don’t want an insurer that’s here today, gone tomorrow.”

David Edwards, from JLT Re’s Credit and Political Risk team, agrees: “There has been a push into specialty lines by insurers and reinsurers because of growing competition in their core property-casualty business.

“This is especially on the reinsurance side, which has seen more competition from non-traditional [ILS] capital providers.”

Active reinsurance underwriters

Edwards reckons there are more specialty reinsurance underwriters active in political risk today – as opposed to specialist underwriters that have dedicated teams writing the line.

“We don’t yet know if that is better or worse for the long term. Is it more likely that those newcomers will step out if it doesn’t go well for them?

“Or are they more balanced by their other specialty activities to the extent that it makes their capacity ‘stickier’?” he asks.

On the plus side, the rising popularity of the credit and political risk market has worked wonders for available capacity.

Ten years ago, the theoretical per risk private market capacity was US$800 million and today it is more like US$3 billion.

On the trade credit side, the limit was US$500 million, and now the ‘nameplate’ capacity is around US$2.25 billion.

Such abundant capacity has actually contributed to demand and banks, in particular, have responded by investing in teams to source new business that can be insured, according to market insiders.

Expansion of the credit and political risk market has stimulated innovation among players as they seek to differentiate themselves.

For example, the non-payment products bought by banks have evolved so that warranties and exclusions are more within the control of the insured; the ‘conditionality’ of the cover has been pared back to a minimum.

Security concerns

Meanwhile, rising awareness of political risk among underlying insureds has fed into associated products, to do with political violence, for example.

Insurers and brokers alike are responding to demand for services that address the security concerns of companies by wrapping political violence products with, for example, kidnap and ransom insurance.

There’s a counterpoint to the positive buzz around the credit and political risk insurance market – the potential for big claims to hit.

In recent years, Ukraine, Russia and Brazil have racked up big claims. Insurers have responded and settled claims effectively, reinforcing the market’s reputation.

But, following recent events close to home, the potential for severity risk is never far away, according to Edwards.

“There are many highly leveraged companies active in the economy that may struggle to survive if they hit a bump in the road, whether it’s inside or outside their control.

“Another Carillion could generate a significant single loss and reinsurers fear that more now than they did in the financial crisis.”


Please contact Matthew Strong on +44 (0)20 3797 7720 or matthew_strong@jltgroup.com



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