Tuesday, February 15, 2011

Egypt Drives Demand For Political Risk Insurance

February 14, 2011

Ongoing unrest in Egypt has sent prices for political risk insurance coverage from Bermuda and London carriers surging by 12 percent to 15 percent for companies established there — and even higher for some professionals like journalists — experts have told “Risk & Insurance” magazine.

And even though the country’s embattled leader Hosni Mubarak resigned on Friday and handed the reins of power over to a transitional military government , the demand for political risk coverage in Egypt and other North African and Middle Eastern countries – including Yemen, Algeria and Jordan — is unlikely to abate over fears of a regional domino effect.

“People are doing ‘panic buying,’ and it is driving up demand,” Smita Malik, director of commercial insurance at Clements International, told the trade journal’s editor Cyril Touchy. “Prices are going up. Insurers and underwriters are already a bit concerned. Eventually, it will ebb and adjust.”

Primary re/insurance carriers in Bermuda and at Lloyd’s are re-examining their political risk policies as the fast-developing events in the region reshape risk exposures and available capacity. Bermuda reinsurers ACE — through its subsidiary Sovereign Risk Insurance Ltd. — and Axis are among the among global catastrophe re/insurers based here which are expected to face political risk claims as a result of the Egyptian chaos.

“The first two months of the year have seen major–and largely unexpected–political upheavals in countries rated relatively stable by political experts,” reported “Risk & Insurance”. “In mid-January, Tunisia President Zine al-Abidine Ben Ali fled the country following peaceful protests. In Egypt, protesters and pro-government supporters clashed over the future of President Hosni Mubarak. In Jordan, King Abdullah II dismissed the government and appointed a new prime minister.”

Now analysts fear the revolutions in Tunisia and Egypt might cause a chain reaction of popular uprisings against authoritarian regimes throughout the region.

“In the past month major analysts .. have published reports naming Egypt as one of their most recommended offshoring destinations,” said one technology industry consultant this week . “Global management consultancy AT Kearney even placed Egypt as the fourth most attractive location anywhere on earth. How could they have got it so wrong?

“That’s a little unfair to the analysts. They have judged Egypt and other countries on fundamental measures such as population, education, and infrastructure. On all those measures Egypt should rank highly. But does the failure of the analysts to predict a wave of civil unrest demonstrate that many commentators in the offshoring industry are ranking political risk as a less important measure than others?”

This sentiment is echoed by others. Too often firms discount political risks to their strategies, costs, and returns, say re/insurance analsysts. Events in Egypt help underscore the potential downfall of such miscalculations. Consequently, companies are being encouraged to urgently reassess their political risk insurance needs.

“Political risk and political risk insurance must assume a larger role in how firms gauge market opportunities during strategic planning and operational phases, and prepare themselves in case of an unforeseen event,” said one industry commentator.

This specialist field has undergone a revolutionary transition in recent years — with the emergence of Bermuda as a new centre of political risk insurance underwriting driving most of those changes.

“Traditionally, the insurance on offer has covered political violence (war, insurrection and such), nationalisation and expropriation of assets and currency inconvertibility,” said “The Economist” in a 2007 report on the political risk insurance (PRI) market. ” … In recent years, however, the industry has experienced upheavals of its own. Three in particular: innovation in offerings, a greater role for private insurers, and a narrower focus for some of the public insurers that used to bestride the field.

“Innovation has been fostered partly by clients seeking new forms of cover. Banks, for instance, now frequently seek insurance against governments or foreign entities failing to honour contracts for political reasons. They may have made a big loan to an infrastructure project, which the government might seek to expropriate, for example. Such cover accounts for half the political-risk policies written by some underwriters. Sovereign Risk Insurance, a Bermuda-based specialist insurer founded in 1997, is in 114 emerging markets and is particularly active in this area. One of its contracts is a seven-year, $95 million policy backing a foreign bank’s structured-finance business in Brazil.”

Sovereign was launched as a joint venture by Bermuda re/insurers ACE and XL to enter the primary political risk insurance underwriting market.

“Our vision in forming Sovereign in 1997 was to create an underwriting agency which could offer banks, export credit agencies and multinationals meaningful per-project limits as well as the ability to write non-cancellable terms out to 10 years,” said then Ace CEO Brian Duperreault. “We were also determined to give this new entity maximum flexibility and as much protection as possible from the sometimes erratic cycles of the commercial reinsurance market.”

Sovereign has subsequently emerged as one of the world’s leading underwriters of political risk insurance and reinsurance. Sovereign’s clients include many of the world’s largest banks, exporters, multinational corporations, export credit agencies and multilateral agencies.

“Bermuda’s role in the public and private political risk markets is obviously a very positive development
for these markets,” said Sovereign president and CEO Price Lowenstein speaking on the third anniversary of the firm’s creation. ” … Sovereign has added an important source of stable, long-term capacity to the private market, which is making it easier for banks to cover longterm project finance transactions and investors to cover long-term direct equity investments.

“Bermuda’s role in Lloyd’s is also seen as an important step in assuring the long-term viability of the Lloyd’s PRI market. As the public and private PRI markets continue to expand, so will Bermuda’s importance. If the past is any
prologue, this trend will continue and the PRI markets and Bermuda will develop at a pace and in ways that will surprise us all.”