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Political risk capacity for region evaporates

Insurers unwilling to provide coverage in Mideast, N. Africa

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Political risk capacity for region evaporates

Companies in northern Africa and the Middle East that lack political risk insurance or other coverage for losses stemming from violence such as that in Egypt may be unable to secure the coverage in the near future, experts say.

Riots aimed at toppling the government of Egyptian President Hosni Mubarak could be repeated in other nations in the region, insurers and brokers fear, and underwriters have no appetite to take on new political risk policyholders there.

“We're looking at almost any emerging market or country with authoritarian rule where freedom of speech or voting rights are repressed” as potential hot spots where the sort of violence seen in Egypt could erupt, said Evan Freely, global head of the political risk and trade credit practice at Marsh Inc. in New York.

Saudi Arabia and Kuwait are two places where civil unrest could cause significant problems that would ripple through the insurance market, Mr. Freely said. There are large commercial operations in both countries and large insured losses would result if companies were forced to abandon their investments and evacuate personnel, he said.

Calls for regime change have erupted across the region after flaring first in Tunisia, where President Zine El Abidine Ben Ali was forced to flee in late January after protesters took to the streets over food prices.

The chaos in Egypt began shortly afterward, and governments in Jordan, Yemen and other countries in the region have made changes as political leaders have stepped down in the face of protests.

Businesses that operate in the region without political risk coverage likely won't be able to find it soon, sources said.

“Insurance would already have to be in place,” said Andrew van den Born, London-based executive director, financial solutions at Willis Ltd. “No amount of premium would sway underwriters to do anything right now.”

Even if an insurer were willing to take on a risk in the volatile region, if a loss occurred, “their reinsurers would not be happy,” said Mr. van den Born.

Much of the region is a hot spot for potential violence, said Kirk Pasich, a Los Angeles-based partner in the insurance practice at Dickstein Shapiro L.L.P. “If we were mapping out political risk and using the color red to mark sensitive areas, there would be a lot of red around Egypt,” he said.

The spread of violence to other nations, particularly Saudi Arabia, is a concern in the insurance market, Mr. Pasich said. Political risk coverage in the Middle East would be difficult to obtain in areas already affected by upheaval and a spread of violence would further tighten the availability, he said.

When the chaos in Egypt and the region has calmed, “then people should think about putting the proper measures in place and buying appropriate coverages” to protect against potential losses from violence in the future, Mr. van den Born said.

He acknowledged, though, that even after Mr. Mubarak steps down, there likely will be a lengthy transition process to a new government in Egypt.

“Events like this can spark up quickly,” Mr. van den Born said. “That's why you need to have coverage in place (before it is needed). It's too late now.”

“A lot of corporations over the last several years have taken on more and more emerging-market risk without insurance,” Mr. Freely said. “That's been a fairly benign market for political risk.”

Instead, companies have paid more attention to political risks in Europe, where, for example, violence flared in Greece over government austerity measures and many believed would spread to other countries in the region.

“We think now that more clients are going to be looking more closely at the Middle East” when considering their political risk exposures, Mr. Freely said. “I would venture to guess that the product will get more popular over the next couple of years.”

While companies in the Middle East and North Africa aren't likely to find political risk coverage right now if they don't already have it, sources say there are things they should tend to as long as the tenuous conditions exist.

A risk manager with a global hotel group said he has been in regular contact with properties that his company manages in Cairo and elsewhere in the Middle East because “this is starting to look like a domino game.”

Managers at properties in Africa and the Middle East are being advised to stock up on supplies and cash in case the violence that has rippled through Tunisia and Egypt spreads to other countries, the risk manager said.

Justin Priestley, London-based head of Aon Risk Solutions' crisis consulting team, said an immediate concern for companies is safety of their employees.

“What's going on in Egypt highlights the need for organizations to have plans and procedures in place to protect both in-country workers and traveling personnel from getting caught up in violent clashes of this kind,” Mr. Priestley said in a statement.

“Situations like this can blow up very quickly, and in places that have traditionally been considered safe,” he said. “Organizations need to have robust travel risk management and incident-response mechanisms to ensure that they are doing everything possible to protect their employees and keep them informed.”