Friday, March 4, 2011

Brokers Address Political Risk Exposures in Wake of Egyptian Crisis

Amy O'Connor - February 22, 2011

The civil and political unrest in Egypt has brought to light how vital political risk coverage is — regardless of the country in which a company has operations.

Roger Schwartz, senior vice president of Aon Crisis Management's Political Risk Practice, says there has been an increased interest in the coverage since the unrest in Egypt began, but if coverage wasn't secured for this region beforehand, it will be difficult to insure now.

"You obviously can't go in and get coverage while the problems are still going on – you can't cover a burning building," he says. "But people are asking about it. It is a cautionary tale because it shows these things can occur and there is a price you will pay if you don't prepare."

Egypt wasn't an imminent threat on the political risk radar, but after what has been witnessed by the world in the past few weeks, everything can change in an instant.

"[The Egyptian issues] took people off-guard a little. The regime has been there for 30 years or more," says Evan Freely, global practice leader of Marsh's Political Risk and Trade Credit Group in New York. "People understand that regime changes are a risk, but most people's models didn't have Egypt as having problems anytime soon, so it took people by surprise."

Aon's 2011 Political Risk Map, which the company releases every January, didn't list Egypt as one of the highest risk countries because there hadn't been significant political changes in so long.

Schwartz says the map is not an up-to-the-minute risk map, but rather a snapshot of the current threats in the world. The highest risk countries listed in the report were the same as last year: Iraq, Iran, Afghanistan, Sudan, Zimbabwe and the Democratic Republic of Congo (DRC).

However, Schwartz says there has been a heightened risk worldwide because of the credit crunch.

"There was an increase in political violence over the last 12 months, generally speaking," Schwartz says.

Aon's map singles out a main issue every year, and this year it looked at how the credit crunch has affected payment risk exposure in different geographies. In 2010, the map listed a food and water index, noting ow political risk is affected by the availability of those commodities.

Schwartz says whether Egypt's risk is upgraded on Aon's map next year will depend on many different things.

"We are waiting to see what happens," he says. "Does it get better, does it not? If it does or does not, how much better or how much worse?"

Although the situation in Egypt has settled down some since President Hosni Mubarak stepped down, there has been a spillover effect in nearby countries that have authoritarian rule. Experts warn that citizens of other countries with similar types of regimes may also revolt against their governments after witnessing what occurred in Egypt.

There has also been an effect on the industries that Egypt specializes in, such as tourism, gas, energy, manufacturing, cotton and other items; it is unclear when — or if — these exports will return to the level at which they were before the turmoil.

"There are very definitely economic issues that are impacted by the unrest," Schwartz says. "Egypt is still ongoing, and no one has an idea of how it will end up."

Insurers Should Use Egypt Events to Educate Insureds

One of the benefits of political risk insurance is that it provides business interruption coverage. For instances such as the one in Egypt, this coverage would have helped to protect a company's operations during the conflict. Policies can also include political violence coverage, civil commotion, terrorism, sabotage and forced abandonment – all issues that are occurring in Egypt.

"The thing about political risk generally speaking is it is low frequency but high severity," Schwartz says. "It's not something that happens every day, but it does happen, and it tends to be large and severe when it does occur. When we talk to people, we tell them they have to treat [political risk] like a CAT risk."

While buying the coverage may be a no-brainer to insurers, convincing clients isn't always easy.

"The challenge is always that it's a discretionary purchase – corporations don't have to buy political risk insurance," Freely says. "The clients don't always recognize the need for it until it's too late. That is our biggest challenge as a broker. When unrest does happen, like Egypt, it happens quickly."

Marsh recently partnered with Maplecroft to provide analysis for clients on a country's risk and to improve its expertise on structuring and placing coverage around the world. Through this alliance, Maplecroft will analyze a country and its exposures, and Marsh will recommend coverage based on this analysis.

"Things change so quickly that we thought we could provide better service by providing day-to-day analysis of every country," Freely says.

In addition, Freely says the info can be used for clients and brokers to become more knowledgeable about these countries and their exposures.

Marsh also launched its Mobile Asset and Commodity Expropriation (MACE) facility at the end of last year to provide up to $100 million of cover per risk for plant, equipment and inventories located in foreign countries and territorial waters, or while in transit between sites.

Freely and Schwartz agree everyone will be watching the events in Egypt and other political risks closely, and looking for ways to assist their clients, either through coverage or risk management.

"We are always looking for new products for clients. We will see what comes out of the Egyptian situation," Freely says. "That is the thing with political risk, you never know. I would guess we will find some new products out of this crisis."

"This is a general reminder that clients working in emerging markets should, at a minimum, review what their exposures are and make an educated decision on whether there is a need to mitigate that risk from a cost-benefit basis," Schwartz says. "Insureds should at least take the time to look at it."