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HAMILTON, Bermuda-The long-term political risk reinsurance contract between ACE Ltd. and the Multilateral Investment Guarantee Agency propels the Bermuda insurer into a market commercial insurers traditionally have shunned.

By signing on to cover policies with up to 20-year terms, ACE will cover political risks for more than double the policy terms normally available in the commercial political risk insurance market.

The good risk profile of MIGA, a unit of the World Bank in Washington, makes it an attractive risk to reinsure, said Peter N. Mear, general counsel at ACE in Bermuda.

And the ACE coverage will allow MIGA to greatly increase the capacity it offers to $75 million per project and $325 million per country.

Even so, demand for the coverage still will outstrip the capacity available, said Christina Westholm-Schroeder, manager of syndications and business development at MIGA in Washington.

ACE's move into the long-term political risk market is in marked contrast to the stance traditionally taken by commercial insurers, which have been unwilling to commit to such long-term contracts because of the difficulty of predicting future losses.

Until recently, commercial insurers usually limited political risk policy terms to three years. In the past few months, some commercial insurers have started to offer contracts for up to 10 years, including ACE in a joint venture with other insurers (BI, March 10).

But policyholders seeking political risk coverage for terms of more than three years usually have had to seek coverage from government-sponsored agencies, such as the Overseas Private Investment Corp. in Washington, or MIGA, set up in 1988 to cover investment projects in many World Bank member countries.

ACE decided to increase its exposure to long-term risks because of MIGA's good risk profile, said Mr. Mear.

As the projects covered fall under the auspices of the World Bank, they generally have a low claims frequency, he said.

"We are comfortable with the position that MIGA and the World Bank has in the host countries where they do business," Mr. Mear said.

Under the quota share reinsurance contract, ACE will offer coverage for up to $25 million per contract and $100 million per country.

The ACE capacity will be added to MIGA's existing capacity of $50 million per contract and $225 million per country.

The policy terms will be up to 20 years, though most contracts will be for 15 years. MIGA will conduct all the underwriting.

The ACE agreement could be the first of several reinsurance contracts MIGA sets up with commercial insurers, as there still is a large demand for political risk coverage, Ms. Westholm-Schroeder said.

"Even with this extra capacity, we will still be constrained in what we can do, and we will still be limited in our ability to satisfy demand," she said.