Transcript Political Risk Insurance Presentation

“Exploring insurable political risk. Its effect on
the economy and the insurance industry”
By
Maxwell Chiyangwa
Agenda
Introduction
Political Risk Defined
Terrorism/Political Violence Coverage Comparison
Effects of Terrorism on the Economy - 9/11 Retrospective
Assessment
Terrorism vs Political Risk Insurance
Political Risk Insurance
Claims data and scenarios
Summary
MARSH
April 6, 2017
1
Introduction - Political Risk
Africa Overview
• Promising Demographics
• Growing Middle Class
• Booming Economy
• Potential Job Growth
• Infrastructure Development
Threats
• Terrorism
• Political Risk
MARSH
April 6, 2017
2
What is Political Risk?
• Political risk is the probability of disruption to a companies operations by
political forces or events, whether they occur in host countries or result
from changes in the international environment.
• Insurable Political Risk Events are those which Insurers have felt able and
comfortable to identify, quantify and price
• Political Risk Insurance overs more broad cover than cover provided by
Terrorism insurance
MARSH
April 6, 2017
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Terrorism/Political Violence Coverage Comparison
Terrorism Insurance
Political Risk Insurance
More standardized terms; wording similar to property
Tailored, more negotiation
Frequently purchased to meet Lender’s requirements to fill gap
in property cover after 9/11
Often bundled w/ other political perils like Expropriation but
also available on a stand-alone basis.
Pricing driven more off of TIV of portfolio
Pricing based more on limit and country group
More portfolios of exposure insured
More single placements insured but growing demand for and
placement of portfolio cover
Typically, annually renewed terms, although sometimes 3 and
max 5 year policies are possible.
Up to 20 years
Best for: Developed Countries
Best for: Emerging Markets
Both types of coverage may be endorsed to include loss from Business Interruption (loss of business income), Increased
Expense, and Debris Removal (in addition to physical damage loss valued at replacement cost).
List of perils is restricted
MARSH
List of perils is broad
April 6, 2017
4
Effects of Terrorism on the Economy - 9/11 Retrospective Assessment
MARSH
April 6, 2017
5
Effects of Terrorism on the Economy - 9/11 Retrospective Assessment
• 0.5% decrease in GDP growth,
($60b)
• Largest property/casualty claims in
history, at $40b
• Tourism in New York City fell
• Led to insurers offering limited,
restricted, and expensive coverage
for terrorism
• Job losses
• Toll and physical damage $55b
• Led to the signing of TRIA in 2002
(TRIPRA in 2015)
• Economic impact $123b
• Homeland Security and other costs
$589b
• War funding and related costs 2
$1,649b
• Future war and Veterans' care
costs $867b
MARSH
April 6, 2017
6
Effects of Terrorism on the Economy - 9/11 Retrospective Assessment
Impact on Insurance - Distribution of Claims by Class
MARSH
April 6, 2017
7
Terrorism vs Political Risk
Insurance
Terrorism/Political Violence Coverage Comparison
PROPERTY
TERRORISM
POLITICAL
VIOLENCE
Strikes
Can be Covered
Not Covered
Covered
Covered
Riots
Can be Covered
Not Covered
Covered
Covered
Civil Commotion
Can be Covered
Not Covered
Covered
Covered
Malicious Damage
Can be Covered
Not Covered
Covered
Covered
Terrorism
Not Covered
Covered
Covered
Covered
Sabotage
Not Covered
Covered
Covered
Covered
Revolution
Not Covered
Not Covered
Covered
Covered
Coup D'Etat
Not Covered
Not Covered
Covered
Covered
Insurrection
Not Covered
Not Covered
Covered
Covered
Rebellion
Not Covered
Not Covered
Covered
Covered
Civil War
Not Covered
Not Covered
Covered
Covered
War
Not Covered
Not Covered
Covered
Covered
Forced Abandonment
Not Covered
Not Covered
Not Covered
Covered
Nuclear, 5 Great Powers
Not Covered
Not Covered
Not Covered
Not Covered
TRIGGER
MARSH
April 6, 2017
POLITICAL RISK
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Political Risk Insurance
Political Risk Perils
Perils
Coverage
Expropriation
Acts by the host government interfering with fundamental ownership
rights of the insured's investment including, but not limited to,
confiscation and nationalisation.
Forced
Divestiture
Requirement by insured's own government to permanently divest of all
of a shareholding in the foreign enterprise.
Forced
Abandonment
Abandonment of a foreign enterprise as a result of advice by the home
or a relevant region because of political violence.
Inconvertibility
/ Non-Transfer
Delay or inability of a foreign enterprise to exchange local currency
into hard currency/to repatriate funds to the insured parent
corporation.
NonRepossession,
Deprivation
Refusal or failure of the foreign government to allow the insured
to exercise its right to repossess the insured equipment, in
accordance with the terms and conditions of the agreement, or to
remove the equipment or commodity from the foreign country.
MARSH
April 6, 2017
11
Political Risk Perils Continued
Perils
Coverage
Contract
Frustration/
Repudiation
Losses resulting from a cancelled or frustrated contract as
result of political events in the host country, including nonpayment due to political action or inaction.
Structured Credit
Financial losses resulting from a private or public borrower's
failure to make scheduled payments on an insured loan.
Business
Interruption
Consequential financial losses to a non-financial corporate
insured directly resulting from the insured's business
operations
having been interrupted by political violence or expropriation.
Political Violence
Physical damage to investments and assets located overseas
caused by political violence (war, civil war, revolution,
insurrection, strikes, riots, sabotage and terrorism).
MARSH
April 6, 2017
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BROADENING PRI COVER FOR FOREIGN ASSETS & OPERATIONS
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5
4
3
2
1
CURRENCY INCONVERTIBILITY AND NON-TRANSFER
COVERAGE
“PV”, “FA” PLUS CONFISCATION, EXPROPRIATION OR NATIONALIZATION OF THE OVERSEAS
OPERATION (“CEN”) INCLUDING BREACHES OF LICENSES, CONCESSIONS OR MAJOR PROJECT
AGREEMENTS
EXPROPRIATION COVERAGE
FORCED ABANDONMENT COVERAGE (“FA”)
POLITICAL VIOLENCE COVERAGE (“PV”)
SABOTAGE & TERRORISM COVERAGE (“S&T”)
“CEN”, “PV”, “FA” PLUS RESTRICTIONS ON CONVERSION OF LOCAL CURRENCY
INTO USD FUNDS, OR ON TRANSFER OF THOSE FUNDS OFFSHORE (BLOCKING
DIVIDEND, DEBT SERVICE OR OTHER REMITTANCES).
“PV” PLUS ABANDONMENT FOLLOWING CESSATION OF OPERATIONS AS A RESULT OF POLITICAL
VIOLENCE
“S&T” PLUS COVERAGE FOR INSURRECTION, REBELLION, CIVIL WAR, REVOLUTION & COUP D’ETAT
AND WAR
“SRCCMD” PLUS COVERAGE FOR SABOTAGE & TERRORISM
STRIKE, RIOT, CIVIL COMMOTION & MALICIOUS
DAMAGE COVERAGE (“SRCCMD”)
MARSH
April 6, 2017
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BIG PICTURE: MARKET FOR TRANSFER OF “POLITICAL RISK”
‘Broader’ political risks
have long been
excluded by property
insurers. A range of
markets offer solutions
to either specific perils
or the full range of
political risks.
Standalone terrorism
insurance market
used to ‘write back’
the post Sep. 11,
2001 exclusion
Insurance market
categorisation of
‘political’ risks
MARSH
4/6/2017
Investments and Operations: Insured Events
 Confiscation, Expropriation,
Nationalization
 Selective Discrimination
 Forced Divestiture
 Cancellation/ breach of License or
Concession
 Expropriation
 Full Political Violence
 Forced Abandonment
MARSH
PROTECTING
YOUR CROSSBORDER
INVESTMENTS &
OPERATIONS
April 6, 2017
 Business Interruption
 Exchange – Transfer Risk
 Arbitration Award Default
(Gov’t Breach of Contract)
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Benefits of a Political Risk Policy
• A PRI Policy provides risk transfer of catastrophic loss scenarios that can
damage a companies balance sheet and P&L.
• Political Risk Insurance can provide corporate stakeholders – owners,
shareholders, senior management and directors, with comfort that
unforeseen risks in emerging country operations are contained.
• PRI may improve lending arrangements for the parent company’s
international operations.
• PRI can soften perceptions of investors that a company is taking on too
much political risk, thus impacting the stock price.
• Policies may be structured to address one country alone or a portfolio of
countries.
MARSH
April 6, 2017
16
Claims data and scenarios
Claims scenarios
Expropriation
2002
Egypt
A group of US
investors filed
for an
arbitration suit
relating to the
expropriation
of their
interest in the
cotton
industry
2006
Bolivia
A Spanish
owned
electricity
company was
expropriated
2006
Bolivia
Colquiri mine,
owned by
Glencore was
expropriated
and
nationalised
2008
Venezuela
A fleet of oil
rigs owned by
an American
company
were
expropriated
2009
Democratic
Republic of
Congo
Having
already had
their mining
license
cancelled, the
mine was
then
expropriated
from its
Canadian
owners
2012
Bolivia
A Canadian
mining
company had
its mine
expropriated
and
nationalised
2012
Egypt
A Saudi fruit
and vegetable
firm was
expropriated
2013
Argentina
Argentina's
airport
regulator
forced a
Chilean
owned airline
to vacate its
maintenance
hanger at one
of the airports
in Buenos
Aires
Nationalisation
2006
Bolivia
After
expropriation,
the Colquiri
Mine was
nationalised
MARSH
2006
Bolivia
A Spanish
owned
electricity
company was
nationalised
2008
Venezuela
A Spanish
owned bank
was
nationalised
April 6, 2017
2008
Bolivia
An Italian
telecommunica
tions company
had its Bolivian
arm
nationalised
2011
Venezuela
A decree of
order was
forced
reserving the
rights of all
gold extracted
within
Venezuela
2012
Argentina
A Spanish
owned energy
company, the
largest in
Argentina, was
forced to sell
51% of its
stake to the
government
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Thank You
Maxwell Chiyangwa
Surety & Political Risk Practice
[email protected]