Demand for political risk cover increasingPosted On: May. 1, 2019 12:00 AM CST
Rising global instability and increased investments in emerging markets is driving more demand for more political risk and trade credit insurance and capacity is growing, experts say.
Private equity investors — often newcomers to the political risk market — are supporting infrastructure projects in emerging economies and examining their insurance coverage options, they say.
“There is more and more interest from corporates and also new players like alternative capital players and investment firms,” said Rafael Docavo-Malvezzi, senior vice president and global head of risk, political risk credit and bond insurance for Axa XL, a unit of Axa SA.
Political risk and credit insurance can cover physical assets like a manufacturing facility or goods in storage or currency movements in the event of a loss due to political decisions or conditions.
“We’re definitely seeing an increase in inquiries and purchases of political risk insurance,” said John Minor, director of crisis management and political risk for Aon PLC in Chicago. “In terms of business, we’re actually placing into the marketplace, we’re growing very rapidly.”
“There certainly is increased demand,” said Nick Robinson, head of specialty in London with Neon Underwriting Ltd. “There have been events in Latin America, the Middle East and Asia, and the former Soviet Union that have all had claims indications.”
Demand for coverage is driven by claims but also by “global uncertainty in emerging markets and companies’ desires to continue to invest in emerging markets,” Mr. Robinson said.
Inquiries have increased dramatically and coverage purchases have increased less so, but the process of buying political risk coverage can take years from first contact to binding, said Laura Burns, senior vice president and U.S. political risk product leader, political and credit risk, in the financial solutions division of Willis Towers Watson PLC in Potomac, Maryland.
Willis Towers Watson has recently added a director of political risk analysis, Ms. Burns said, adding “We’re investing in this risk class.”
Increased emerging market infrastructure and other projects are helping to drive demand, sources said.
“There’s a lot of interest from capital markets and private players looking for yield in developing these longer-term emerging market opportunities,” Mr. Docavo-Malvezzi said.
“There’s definitely been a marked increase in emerging market infrastructure and construction,” said Marc Wagman, New York-based managing director in the credit and political risk practice group of Arthur J. Gallagher & Co. “There’s a lot more private equity money coming into this marketplace than was previously the case.”
Demand for coverage from traditional sectors, such as energy and mining, continues, but companies in the technology sector, such as data storage firms, are also looking at the coverage, Mr. Robinson said.
“The cloud still has data hubs, which are physical sites located around the world. Those are asset classes where we’ve been seeing increased demand,” he said.
Demand also continues to build both from other geographies and exposures, sources said.
There has been an increase in inquiries for political risk insurance from both Turkey and Mexico, for example, with President Andres Manuel Lopez Obrador taking over in Mexico and “the uncertainty with the new government, as well as the complications of the U.S.-Mexico relationship,” Mr. Minor said.
Currency risk also remains a concern arising from international trade, Mr. Minor said. “I can’t tell you how many times I talk to a risk manager or a treasurer who has suffered a currency loss in a country like Egypt, Angola, Nigeria, Argentina.” According to the Structured Credit and Political Risk Insurance Report and Market Update January 2019 from Arthur J. Gallagher, the U.K.-based international unit of Arthur J. Gallagher & Co., there is now $3.13 billion of political trade risk capacity in the market compared with $2.97 billion in capacity a year ago.
Hartford Financial Services Group Inc. joined the market in December 2018 with lines as high as $100 million for political risk insurance.
“Along with that rising capacity has also come an increased willingness on the part of insurers to go farther out” in the number of years, or tenor, of coverage, Mr. Wagman said.
“There are a number of insurers that for sovereign risks will go out 12, 15, maybe even 20 years,” Mr. Wagman said, adding that the rising number of players at that level is more of a “recent development.”