(Repeats Monday item)
* Political risk insurance high margin and growing
* Dramatic policy changes in U.S., Europe have global impact
* Brexit showed sometimes the unthinkable happens – broker
* Some firms prefer to shoulder risk themselves
By Brenna Hughes Neghaiwi and Carolyn Cohn
ZURICH/LONDON, April 24 Rocked by a shakeup in
the Western political order, companies are buying more insurance
to protect themselves against the threat of rising protectionism
and upheaval to their operations in emerging markets.
Insurers say demand is being driven by uncertainty over the
consequences of a string of events in the developed world – from
Donald Trump’s election in the United States and Britain’s vote
to quit the European Union last year to the presidential
election process now underway in France.
Multinationals – ranging from oil and gas firms to mining
groups, industrial manufacturers and banks – are concerned that
unforeseen changes in government policies could lead to business
disruption, flouted deals and unrest in their growth markets.
The kind of cover they want is not a large contributor to
most insurers’ business but is considered higher margin and is
growing, market players say.
Zurich Insurance said new business at its political risk and
trade credit unit was up 14 percent in 2016, driven by demand
for cover against the risk of a government or state-owned entity
defaulting on its obligations. Growth continued with an 11
percent increase in the first quarter of 2017.
Zurich gave no overall figures but said political
risk was an important part of its specialty risk insurance
business, which totals $2 billion in gross written premiums a
year.
“As we see dramatic changes in U.S. foreign policy and
European policy and the integrity of the European Union itself,
that affects the global environment,” Zurich’s head of credit
and political risk David Anderson said.
“It affects what emerging markets do, and it affects how
countries perceive the rule of law.”
Since becoming president in January, Trump has ordered a
missile strike on Syria, reversing his predecessor Barack
Obama’s decision against attacking Damascus government targets,
and pulled the United States out of the Trans-Pacific
Partnership trade deal with Asian countries.
On top of that is uncertainty over future U.S. policy on
issues such as relations with China and Russia, the nuclear
programmes of North Korea and Iran, and renegotiation of a North
American free trade deal that could hit Mexico badly.
Likewise, the consequences of Brexit remain a major risk
along with campaign promises by Marine Le Pen, who will contest
the French presidential run-off on May 7, to reshape the
country’s EU membership radically, reject trade treaties, pull
out of NATO’s integrated military command and curb immigration.
In an example of policies already used, Zurich paid $31
million to a client who had to evacuate staff from Yemen under a
claim made in 2015 – the year a Saudi-led coalition supported by
the United States began air strikes on the country.
NOT FOR EVERYONE
Three types of cover help companies to protect against
geopolitical risks: trade credit – which covers the risk that
suppliers are not paid punctually – political risk such as
government expropriation of assets and political violence
including terror attacks.
The policies are not for everyone. Some major companies say
they still prefer to bear the risk themselves.
Oil major BP and miner BHP Billiton
have policies to keep external cover to a minimum, with BHP
citing in its annual report “concerns about the value of
external insurance in the natural resource sector”.
Nevertheless, 61 percent of respondents surveyed jointly by
leading trade credit groups Berne Union and International Credit
Insurance & Surety Association said they saw increasing volumes
of new business last year.
The world’s leading specialty insurance market Lloyd’s of
London also said it has seen rising demand for political risk
and violence insurance.
“Brexit made people understand sometimes the unthinkable
happens,” said Evan Freely, who heads broker and risk manager
Marsh’s global practice for political risk and trade
credit.
European, U.S. and Asian clients with a strong foothold in
emerging markets are particularly concerned, Freely said, as
they look to protect themselves against the potential impact of
new regimes on trade relationships.
Risks of disruption to business from political upheaval have
risen globally since the Arab Spring uprisings of 2011 and
insurers see unrest spreading, especially in Africa.
“The shine of globalisation has come off. Maybe there will
be less trade and less benefits coming from trade to many of the
emerging markets,” broker Aon’s director of crisis
management and political risk John Minor said.
COSTS
A firm looking to protect itself against the likes of terror
attacks or asset expropriation in Mexico, for example, would
typically pay around $500,000 for $100 million of cover,
according to James Esdaile, managing director at broker BPL
Global.
Expropriation is not government policy in Mexico, but before
Trump was even elected an opposition senator proposed the idea
of such retaliatory action, should the United States inflict
economic losses on his country to make it pay for a border wall.
Aon’s Minor said that for $750,000, a commodities trader
with operations in 25 emerging and 25 developed markets could
purchase up to $100 million in cover against expropriation,
political violence and currency inconvertibility risks across
those 50 countries.
Legislative risks – such as Turkey’s referendum this month
granting President Tayyip Erdogan sweeping powers
or “mixed signals” on the possible renegotiation of the North
American Free Trade Agreement – are a
particular concern.
These ranked fourth in companies’ list of concerns after
cyber crime, terrorism and political violence, said Clements
Worldwide, which provides insurance to expatriates and
international companies.
Commodities trader and miner Glencore said in its
annual report that its exposure to geopolitical uncertainties
and those related to laws, enforcement, permits and licences
increased in 2016. It is taking out insurance, particularly
credit insurance, to mitigate the impact.
Companies that traditionally took out political violence
insurance were expanding their cover to buy broader political
risk cover on a global basis, Aon’s Minor said.
Germany’s Allianz introduced political violence
policies two years ago. “There are companies that are buying $1
billion, $2 billion or sometimes $3 billion of coverage for
terrorism or political violence, which includes war on land,”
Christof Bentele, head of crisis management at Allianz’s global
corporate and specialty business, said.
Allianz, however, will cover only up to 100 million euros in
political violence claims, and clients have to fill their
additional needs elsewhere, often via Lloyd’s.
(editing by David Stamp)