Political Risk Insurance:
Options in the Commercial
Market
October 5, 2006
Thomas E. Birsic
www.klng.com
Overview
Analysis of the expanding commercial
market for political risk insurance
(PRI) and some of its prominent
players
New developments in private PRI are
eroding some of the perceived
disadvantages of commercial
coverage
Key differences between commercial
PRI and traditional MIGA coverage
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I. Focus on the Expanding Commercial Market
A. Basic Market
Corporations are becoming increasingly aware of the effect
various political risk issues can have on the success and
stability of increased globalization.
Where interest is high, the market usually follows, and PRI is
no exception. In the last several years the PRI market has
seen a renewed expansion in commercial underwriting, along
with an intense focus by brokers and other professionals in the
arena.
According to the 2/20/2006 of Business Insurance Magazine this
increased capacity ha[s] created a buyer s market for the political
risk insurance market - particularly for standard coverage against
nationalization and expropriation.
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B. Scope of Coverage
Basic Coverage Mirrors MIGA: All of the types of risks covered by
government-backed insurance will be found available in some form
in the private marketplace.
Confiscation and Expropriation
Currency Incontrovertibility
Political Violence
Contract Frustration
Potentially Broader Opportunities than MIGA : The private market
purports to offer a broader range and flexibility of cover than
government programs. Cover of certain political risks is unique to
the private market, such as loss with respect to the personal
property of employees, kidnap/ransom/extortion ( KRE ) coverage,
and the cancellation of export licenses by authorities in project
procurement source countries. Further, the private market has the
freedom and willingness to customize coverage to deal flexibly with
novel risks.
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C. Significant Participants
Some Major Underwriters Include:
Lloyd s of London
AIG
Chubb
Zurich
Sovereign
Brokers: major brokerage entities have dedicated extensive resources to
position themselves as expert advisors regarding PRI coverage, such as:
Aon
Marsh
For Example: Aon maintains an extensive Political and Economic Risk
Map, monitoring the various political risks throughout the world, available at
http://www.aon.com/about/publications/pdf/issues/2006_P&E_Risk_Map.pdf
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II. Traditional Disadvantages of Private PRI are
Eroding
New developments in the world
of private PRI have addressed
many of the commonly cited
drawbacks of commercial
coverage.
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A. Cost of Private Coverage
Perceived Drawback: Private PRI has historically been more
expensive than MIGA coverage.
Developing Solution: As discussed earlier, on 2/20/2006,
Business Insurance Magazine reported that developments in
the market have created a soft buyer s market for private PRI,
greatly reducing the cost. Thus, an investor can now likely
find rates which are more competitive with those from MIGA.
Note: Cover may still be more expensive in those areas
where there is no competition from public programs, like MIGA,
or in countries where risk is particularly high and private PRI
supply has remained low.
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B. Duration of Coverage
Perceived Drawback: Until recent years, private PRI had
traditionally focused on coverage limited to renewable 3
year periods, unlike the MIGA s 15 (and in some cases
20) years of coverage offered.
Developing Solution: In recent years private providers,
such as AIG and Sovereign, have begun to offer
coverage of up to 15 years.
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C. Extent of Financial Coverage
Perceived Drawback: Private PRI may provide more limited
financial coverage.
Developing Solution: MIGA is still able to offer more
extensive financial coverage than private providers, such as
the $313 million in PRI covering the development of the
Kupol Mine in the Russian Federation; however, over the last
few years private providers have begun to offer increasingly
larger levels of financial coverage.
For example: Zurich recently increased its limit for PRI to
$80 million and Sovereign underwrites individual political
risks on a stand alone basis with limits of up to $125
million on a 15 year term.
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III. Some Significant Differences Between
Private PRI and MIGA
A. MIGA s country-related requirements
typically not applicable to private PRI
No nationality requirement: The private company
will not have a nationality requirement other than
that the insured not be a citizen of the host country.
No socio-economic requirements: Private PRI
providers insure without regard to such factors as the
host country s level of economic development, or the
investment s economic effects upon the investor s
home country.
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B. Private PRI covers new and existing investments
New and Existing Investments: The private insurer
commonly will insure existing as well as new investments,
whereas the government insurance companies, like MIGA,
will usually only insure new projects, or the expansion of an
existing project.
Why the Difference?: This is because the underlying
rationale of coverage like MIGA is the promotion of
foreign investment.
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C. Private PRI adds flexibility and an opportunity
to negotiate
Flexibility: With a private company, often there is more
flexibility and opportunity to negotiate the provisions
of the policy. The government companies are usually
not willing to alter the provisions of their standard form
of policy.
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D. MIGA coverage centers on public consultation and
disclosure, while private PRI takes a more confidential
approach
Disclosure Differences: Under MIGA, the host government is
informed of the coverage. Private sector policies often prohibit the
investor from disclosing the fact of the coverage. In fact, disclosure
can nullify the policy.
Why the Difference?: The government companies feel that a
foreign government will be less likely to take expropriatory
action if they know it will lead to a direct claim by, and potential
conflict, with the other government.
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E. Private PRI can respond to a potential
customer s needs with great speed
The Speed: The speed with which private market brokers and
underwriters can respond to a potential customer for political risk
insurance can be a major advantage. Typically, a broker can
obtain a quote from an underwriter in the London or American
market in a matter of days for risks that are not extraordinary in
size or character.
The Advantage of Speed: Such speed may not be a major
factor in the planning of an equity investment, but it can
make a big difference to a supplier of goods or services that
needs such information in order to price and pursue a
contract.
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Concluding Remarks:
Although private PRI has traditionally been less
attractive than MIGA because of its historically
higher cost and more limited coverage options,
developments in the market have eroded many
of these differences.
Due to these changes, commercial PRI is a more
attractive alternative for foreign investors.
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