News

“There is a unique opportunity to grow the political risk insurance market”

The time is ripe for insurers and brokers to raise awareness of political risk and political violence

By Hermès Marangos and Sean Redden

The year 2015 was a challenging one for political risk insurers and the first few weeks of 2016 indicate that another difficult year could lie ahead.

Lower oil and metals prices have been placing pressure on fragile political regimes, commodities traders and energy projects and the World Bank’s recent forecast of an average oil price of $37 for this year, indicates that there could be some way to go before prices head upwards, despite the looming production war between Saudi Arabia and Iran as a result of the lifting of EU sanctions on the latter and the partial lifting of US sanctions.

Combined with the terrorist attacks in Paris and Istanbul at the end of last year, tensions in the Middle East and North Africa, ongoing problems in Ukraine and the continuation of Russian sanctions, political risk insurers may be wondering if there is any light at the end of the metaphorical tunnel.

There is definitely a silver-lining for political risk insurers but it is useful to dig a little deeper into the current global picture before addressing the opportunities for the market.

While it is tempting to view the timing of all of these events over the past two years as an unfortunate co-incidence, a January 2016 report by Citigroup entitled “Global Political Risk – The New Convergence Between Geo-Political and Vox Populi risks and Why It Matters” argues that the world’s difficulties are inter-connected.

In its 70-page report, the bank’s political and economics analysts review the current global picture and argue that these events should not be viewed as “regionalised and idiosyncratic” but rather as different facets of a complex picture.

More specifically, Citi says that the convergence of traditional geo-political risks with new socio-economic or “vox populi” risks (a term that they have coined which encompasses the general “rise of anti-establishment sentiment, non-mainstream political parties and protest as a source of disruption to the business and investment environment”) have the potential to create a more unstable world.

In particular, “vox populi” risks could tempt overseas governments to shift blame for economic difficulties to foreign governments and/or businesses, to revert to protectionism and/or to manipulate exchange rates among other things.

Without pulling its punches, Citi also argues that a contributing underlying factor to these issues is the decline of “Pax Americana”, which they describe as the American military, economic and diplomatic power that had helped to ensure global political stability and economic development since the Second World War.

With respect to the political risk map for 2016, in addition to the hotspots mentioned above and the well-known issues which face the EU, Citi also cite China’s decision to challenge the US’ influence and status in Asia as another key issue.  In this regard, while many European analysts and financial reporters have focussed on China’s declining demand for commodities, the ever-growing reach of China’s political and economic activities has been overlooked by them.

For example, the South China Sea territorial dispute and China’s related land reclamation activities in the Spratly Islands (that lie along South East Asia’s major shipping route)[1] do not appear to have attracted at much attention in Europe as they have in the US and Asia-Pacific, but these developments are directly relevant to marine, energy and political risk insurers that insure Asian risks.

Significantly, it also appears that the reach of China’s interests may be coming closer to home.  In this respect, Dr Michael Ivanovitch has cited China’s recent 67% acquisition of the Pireaus Port Authority for $368.5 million, its $3.3 billion agreement with Algeria to build and manage the latter’s major seaport of Cherchell and a planned $1.6 billion development of the Pakistani deep-sea port of Gwadar as evidence that China is set on developing a “Maritime Silk Road” which stretches from Asia to Europe.

In light of all of these developments, Citi have observed that “the sense that political risks have actually increased in a more globalised and inter-connected world – in number if not in terms of scale – is hard to escape”.  However, most importantly, it is Citibank’s conclusion which provides a glimmer of light at the end of the tunnel for political risk insurers.

Citi asserts that going forward, “political and business leaders will need to be more attuned to the new shape of global political risk”.  In other words, Citi’s message to the international corporate community is that heightened geopolitical political and socio-economic risks will be part and parcel of doing overseas business for the foreseeable future.

While the increase in such risks will create challenges for multinationals, it is also fortunate for them that the insurance market has existing products which can mitigate those risks: political risk insurance and political violence insurance.

Although “vox populi” risks can lead to riots, strikes, civil commotion and perhaps even rebellions and coup d’états, the physical property damage that can result from those events are covered by political violence insurance.

Notably, the same risks may also lead to licence cancellations by host governments, protectionist measures such as increased taxes for foreign-owned business, or the imposition of measures which make it difficult to extract hard currency from host countries.  However, political risk insurance provides cover for such actions by sovereigns.

For these reasons, there is a golden opportunity for brokers and insurers to cross-sell political risk and political violence covers to existing energy, manufacturing, property and/or construction insureds, to the extent that they are not already doing so.

Furthermore, there is a unique opportunity for insurers and brokers to work together to increase the size of the market’s total premium pool by spreading awareness of political risk and political violence products beyond existing clients.

Armed with the Citi report in one hand and policy wordings in the other hand, the time is ripe for insurers and brokers to raise awareness of political risk and political violence products in international construction, mining, energy and property development magazines, journals and conferences.

Steven Fidler of the Wall Street Journal has rightly written that “the economic and geo-political outlook appears more unsettled this year than it has in decades”, but we can spread the message that existing political risk and political violence insurance products will provide multinational businesses with the necessary risk mitigation tools for operating in the current global environment.

[1] BBC News Online, “Q&A: South China Sea Dispute, accessed on 28 January 2016 at  http://www.bbc.co.uk/news/world-asia-pacific-13748349.

This article was originally published in Insurance Day and can be found here.