Interest in political risk coverage spikes

Capacity in the political risk and trade credit insurance market continues to grow, driven as much by capital deployment decisions by insurers as it is by political turmoil and global security and credit needs.

Political risk insurance has long offered protection against seizure of assets by foreign governments, and trade credit insurance protects sellers of goods against nonpayment due to insolvency and political events, among other things.

Political and economic turmoil from Venezuela to the Crimea has sparked more interest in the products, although by the time a country reaches a crisis point, most insurers will have already withdrawn capacity for most risks in that nation.

For insurers, the increased interest in the coverages helps them diversify their risks.

“The political risk trade credit sector is viewed as substantially uncorrelated with the traditional property/casualty product suite,” said Dan Sussman, president of political risk and trade credit for Ironshore Inc. in New York. “As a result, that diversification is seen as attractive even though pricing dynamics are certainly not a hard-market scenario. They are adequate to allow underwriters to bring in revenue and earnings streams that fit very well in a multiline insurance platform.”

And political risk historically has been a profitable line of business, which makes it attractive to insurers operating in an overall soft property/casualty insurance market, said James Brache, Denver-based deputy managing director of credit and political risk for Zurich North America.

“The political risk market tends to be countercyclical to the property/casualty market,” said John Minor, director of crisis management and political risk for Aon Risk Solutions in Chicago. “So, when rates soften in the property/casualty market, a lot of that capital seeks a better return and ends up in the political risk market.” 

Arthur J. Gallagher & Co.’s Report and Market Update: Credit and Political Risk Insurance, published annually, pegs “total possible maximum per risk” market capacity for political risk and trade credit risk at $2.9 billion as of January 2017, up 6.3% from the prior year.

“There has definitely been a dramatic increase in the general awareness of political risk and structured credit insurance,” Nick Ollerenshaw, executive director of structured credit and political risk for Arthur J. Gallagher in London, said via email. “So, we’re seeing a clear increase in both supply and demand, with the market’s maximum per risk capacity having more than tripled over the last 10 years.” 

“There’s no question in the last two to three years there is more interest,” said Rafael Docavo-Malvezzi, senior vice president and global head of risk, political risk credit and bond for XL Insurance America Inc., a unit of XL Group Ltd. “Basically, geopolitical realities are more complex.” 

“There continues to be pretty significant demand for political risk insurance from companies including banks, as well as corporates doing business in high-risk countries, companies involved with infrastructure projects, such as power, oil and gas, water concessions or other large capital projects in areas like sub-Saharan Africa, Middle East and certain Latin American countries,” said Mr. Minor.

Demand for coverage is also coming from companies with manufacturing facilities in markets such as Brazil, China, Russia and Vietnam, he said.

“There’s definitely been an uptick in the number of inquiries,” particularly over the past 12 months, although pricing remains soft, said Jamie Lee, head of political risk in the Americas for American International Group Inc. in New York.

Pricing remains soft, sources said.

“There’s been a general downward trend year on year in pricing across our portfolio for the past three years,” said Mr. Sussman. “It’s been notable but not extremely material. We think the margin compression has slowed down, and we’ve seen broadly adequate pricing across our portfolio.”

The number of claims has increased over the past several years, however.

“We definitely have had over the past five to seven years more political violence claims than we had prior to that,” Mr. Brache said, adding that one of the largest political violence claims Zurich paid in recent years was “a couple of years ago” in the Ukraine when separatists damaged the assets of an insured.

AIG’s Ms. Lee said that despite recent headlines, market conditions are now favorable for companies seeking political risk and trade credit insurance, with terms extending out as long as 15 years in some cases.

Some policyholders are looking for wider coverage. “Supply chains, I think, are looked at much more closely right now because of increased uncertainties on the global trade front,” said Mr. Minor. “We’re seeing a number of inquiries coming in just looking at supply chain issues.” 

Others see opportunity in a market with room for further penetration.

“Our market only covers 10% of global trade and investment flows. The pie is there. So how do we get a bigger slice?” Mr. Docavo-Malvezzi said.