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RISK MANAGEMENT

Volatile world no match for soft market

Political risk capacity high despite risks

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Pricing for political risk insurance is soft despite the global business environment growing more perilous and limiting insurers' appetites for nations with active conflicts.

“Everybody admits — from what we see, hear and read — that we seem to be in a new, more risky phase for the world economy; but paradoxically, the political risk market is soft,” said Stephen Kay, New York-based U.S. political risk and structured credit practice leader of Marsh USA Inc.

Plentiful insurance capacity has spilled over from the property/ casualty space into specialty coverage, dragging down rates for political risk insurance, sources said.

“If you are seeking to lay off political risk, this is not a bad market to do it in because the pricing in this market segment has followed the general market trend downward over the past couple of years,” said Sean McGovern, chief risk officer and general counsel at Lloyd's of London. “Competition has increased and, as all that surplus capacity is looking for deployment, it's inevitably looked into lines of business such as political risk.”

“Geopolitical concerns remain prominent in the minds of respondents to the Global Risks Perception Survey for the second year in a row,” according to the Global Risks Report from January's World Economic Forum in Davos, Switzerland.

“On the supply side for a number of years, main lines like property and casualty have been soft, so insurance companies and new investment capital have been flocking to specialty insurance products where the returns have historically been higher,” said Mr. Kay. “There has been an expansion of capacity into this tiny specialist market, all chasing business.”

Capacity for a single-project risk rose 5% to $2.23 billion in 2015, Arthur J. Gallagher & Co. said last July in an analysis of the London political risk insurance market.

The rise in capacity has had the opposite effect on rates.

“Rates are the softest I've ever seen in almost 19 years of doing this,” said Curtis Ingram, vice president of Aon Risk Solutions' political risk practice in San Francisco. “In speaking to other old timers, this is the lowest they've ever seen.”

“When you speak to underwriters, they feel they've bottomed out,” he said.

“For insureds, certainly this is the time to buy. It's never been so cheap, and the new markets and capacity lead to broader terms and conditions,” Mr. Ingram said.

“We've seen steady growth of our political risk book here at XL, and there are a lot of new corporate clients and bank clients buying the product,” said Stuart Barrowcliff, New York-based vice president and senior underwriter of political risk and trade credit at XL Catlin, the marketing name of XL Group P.L.C.

“There are brand-new customers coming into it,” he said.

“We are seeing more demand for it, particularly coming from the banks and the asset managers,” said Mr. McGovern. “They are looking to lay off risk for their own capital and solvency purposes.”

“There definitely has been increased interest. Zurich's political risk product area was up 8% by premium volume in 2015 compared with 2014,” said David H. Anderson, Washington-based senior vice president and director of global business development for credit and political risk at Zurich North America's credit and political risk unit.

However, written coverage increased only “modestly” in 2015 as clients faced the cost of a discretionary purchase, said Aon's Mr. Ingram. “I think the pulling-of-the-trigger decisions will be increasing this year.”

While the rate environment is favorable, countries with active conflicts or those producing claims are likely to attract little risk appetite.

“If you've got a country that suddenly experiences some major democratic revolution or some other major uncertainty, be it war or invasion, clearly the risk profile of that country changes completely almost overnight,” Lloyd's Mr. McGovern said.

“Therefore, underwriters' appetite for exposures to that country and their expectations around the margin they would expect to get for taking risks

in that country change dramatically.”

“Underwriters may have a very different disposition toward that country in light of events that lead to some claims,” he said.

“Things can get risky and volatile very, very quickly without a whole lot of warning,” said XL Catlin's Mr. Barrowcliff.

“If you look at Ukraine, Libya, Yemen — three countries where there are active claims coming in today — it will be difficult to find cover in the market for countries like that,” Zurich's Mr. Anderson said.

“Customers shouldn't wait until the proverbial 'house is on fire' to ask for coverage,” he said. “We do see that from time to time, and they're not going to find a lot of appetite for countries where there's an active conflict going on or default has already begun.”

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