Symposium Highlights Challenges, Way Ahead for Political Risk Insurance Market
The event, attended by more than 200 public and private political risk insurers, brokers, investors, lawyers, and academics, highlighted the challenges facing the industry and their effect on pricing and products, as well as the industry’s willingness and awareness of the need to adapt.
“The external environment in which we operate has been changing rapidly over the last several years,” said Yukiko Omura, Executive Vice President of MIGA, kicking off the event. Despite record levels of foreign direct investment in emerging markets, she noted, “not all developing countries have been winners, particularly those perceived to be risky and where capital is limited.”
As a result, investors are turning more and more to local partners to help shoulder the risk and offset the perceived noncommercial threats to investment in developing countries, Omura noted. At the same time, excess market liquidity is placing pressure on the pricing of political risk insurance (PRI), even in some “riskier” markets. Public providers, which may have a mandate to “price to risk” and have significant administrative costs, may find it difficult to offer coverage at prices that can satisfy investors and lenders.
When it comes to products, the market faces a different set of challenges, resulting from changes in the types of projects and risks that investors and lenders are facing, and from the claims experience of some investors.
In this global landscape, the demands on the political risk industry are shifting, with investors calling for more specific coverage of regulatory risk, expanded breach of contract coverage, local currency coverage, and longer tenors.
Speaking to these issues at the symposium were political risk practitioners, investors, and academics, who focused their remarks on potential new products, such as coverage based on awards stemming from bilateral investment treaties and the merging of standalone terrorism coverage and traditional political risk insurance; lessons learned from private power projects in emerging markets and new models for financing and risk management; and the challenge of managing regulatory risk. Participants concluded with a roundtable on what lies ahead for the industry.
Whether in coverage of terrorism risk, breach of contract, or public-private partnerships (PPPs), conference participants noted that current coverages do not sufficiently address the risks investors believe they are now facing—particularly due to the growing trend toward “creeping expropriation,” wherein a series of acts eventually, and sometimes indirectly, leads to a loss of assets.
Potential solutions outlined by panelists included a call to revisit the current treatment of terrorism coverage found in many investment insurance contracts; better coverage of breach of contract by including coverage of bilateral investment treaties and through more effective use of arbitration panels and other bodies; and more effective coverage of sub-sovereign entities and other parties in PPP transactions.
The growth of South-South investments is also a challenge for the PRI industry, conference participants noted. Most investors in developing countries and emerging markets do not have national investment insurance agencies, and major private PRI providers have not yet concentrated on this market. As a result, many South-South investors are still not aware of the range of political risk mitigation tools that are available to them, which may hinder further investment.
“The PRI industry obviously has a significant role to play in helping investors mitigate risks,” said Omura. “An event such as this creates an important forum for dialogue among public and private PRI providers, to help us respond to the demand for better coverage and to ultimately lead to more successful investments in the developing world.”
Release no. 2007/105