Hedging Poltical Risk
Moore, Howard L., Global Finance
The world is perceived as a riskier place, judging by the rising demand for private for political risk insurance, and standard coverages are being tailored for the individual needs of lenders and direct investors in rebounding emerging markets.
"Growth is continuing," says Price Lowenstein, president and CEO of Sovereign Risk Insurance. There has been a steady increase in the demand for political risk insurance by project sponsors and institutional lenders" Perhaps one positive byproduct of globalization is that memories of financial executives and investors are becoming longer. Still feeling the sting of the Asia crisis and its domino effect through Latin America, Russia, and the rest of the emerging markets, the corporate and investment community has retained a heightened awareness of risk, which has created a tremendous call for political risk insurance. "This sequence of events has triggered an awakening and an education process about political risk coverage," says Pat Skold, staff consultant at Chubb Political Risk.
"We're seeing more of a demand than ever before. Companies realize that events in one part of the world are not confined and that volatility in a particular region is difficult to predict;' says Ken Horne, senior vice president at insurance brokerage Marsh. Much of the pressure is coming from investors. "Shareholders of large companies have concerns about emerging economies and are putting pressure on CEOs and CFOs," says Dan Riordan, senior vice president and managing director at Zurich US Political Risk. Direct clients have the view that things can change quickly, and it's better to be covered by political risk insurance than not," says Dennis Parker, managing director of investment insurance international at AON Political Risk.
The hot spot is Latin America, particularly Argentina and Brazil."The volume of business in those two countries coupled with currency concerns make them the two most active markets," says Lowenstein."Asia is beginning to pick up also. We're seeing more activity, and we expect it to pick up in the next year." Substantial privatizations in telecom and power are driving the demand for coverage of bank loans, project finance, and equity investments.
But does it pay off? "There are a number of claims in the market emanating from Pakistan and Indonesia, which proves the utility of the product," says Lowenstein. Furthermore, "the products have evolved considerably because of the growing demand and the risks that investors and traders are running into," says Skold.
Underwriters are being more careful, but the availability of insurance has not diminished."People are taking better advantage of the cover," says Parker. In one transaction AON covered a bank for the inability of a borrower to repay under a loan agreement because of a revenue shortfall. Another novelty transaction provided coverage of a single bank within a syndicate, recognizing that it is not in control of the loan agreement.
"The most attention is on contract frustration," says Lowenstein. "We're expanding our coverages in that sector." Others echo the sentiment. "We offer to protect investors by enhancing expropriation coverage if there is a breach and it goes into arbitration," says Riordan. Unavailable until just a few years ago, it has become more popular because of the number of privatizations. "The need for breach-of-contract coverage was brought to a head because of expropriations in Indonesia over the last two years with power purchase agreements between PLN, Indonesia's power authority, and several US power companies," he says. …