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“Exploring insurable political risk. Its effect on the economy and the insurance industry” By Maxwell Chiyangwa Agenda Introduction Political Risk Defined Terrorism/Political Violence Coverage Comparison Effects of Terrorism on the Economy - 9/11 Retrospective Assessment Terrorism vs Political Risk Insurance Political Risk Insurance Claims data and scenarios Summary MARSH May 10, 2017 1 Introduction - Political Risk Africa Overview • Promising Demographics • Growing Middle Class • Booming Economy • Potential Job Growth • Infrastructure Development Threats • Terrorism • Political Risk MARSH May 10, 2017 2 What is Political Risk? • Political risk is the probability of disruption to a companies operations by political forces or events, whether they occur in host countries or result from changes in the international environment. • Insurable Political Risk Events are those which Insurers have felt able and comfortable to identify, quantify and price • Political Risk Insurance overs more broad cover than cover provided by Terrorism insurance MARSH May 10, 2017 3 Terrorism/Political Violence Coverage Comparison Terrorism Insurance Political Risk Insurance More standardized terms; wording similar to property Tailored, more negotiation Frequently purchased to meet Lender’s requirements to fill gap in property cover after 9/11 Often bundled w/ other political perils like Expropriation but also available on a stand-alone basis. Pricing driven more off of TIV of portfolio Pricing based more on limit and country group More portfolios of exposure insured More single placements insured but growing demand for and placement of portfolio cover Typically, annually renewed terms, although sometimes 3 and max 5 year policies are possible. Up to 20 years Best for: Developed Countries Best for: Emerging Markets Both types of coverage may be endorsed to include loss from Business Interruption (loss of business income), Increased Expense, and Debris Removal (in addition to physical damage loss valued at replacement cost). List of perils is restricted MARSH List of perils is broad May 10, 2017 4 Effects of Terrorism on the Economy - 9/11 Retrospective Assessment MARSH May 10, 2017 5 Effects of Terrorism on the Economy - 9/11 Retrospective Assessment • 0.5% decrease in GDP growth, ($60b) • Largest property/casualty claims in history, at $40b • Tourism in New York City fell • Led to insurers offering limited, restricted, and expensive coverage for terrorism • Job losses • Toll and physical damage $55b • Led to the signing of TRIA in 2002 (TRIPRA in 2015) • Economic impact $123b • Homeland Security and other costs $589b • War funding and related costs 2 $1,649b • Future war and Veterans' care costs $867b MARSH May 10, 2017 6 Effects of Terrorism on the Economy - 9/11 Retrospective Assessment Impact on Insurance - Distribution of Claims by Class MARSH May 10, 2017 7 Terrorism vs Political Risk Insurance Terrorism/Political Violence Coverage Comparison PROPERTY TERRORISM POLITICAL VIOLENCE Strikes Can be Covered Not Covered Covered Covered Riots Can be Covered Not Covered Covered Covered Civil Commotion Can be Covered Not Covered Covered Covered Malicious Damage Can be Covered Not Covered Covered Covered Terrorism Not Covered Covered Covered Covered Sabotage Not Covered Covered Covered Covered Revolution Not Covered Not Covered Covered Covered Coup D'Etat Not Covered Not Covered Covered Covered Insurrection Not Covered Not Covered Covered Covered Rebellion Not Covered Not Covered Covered Covered Civil War Not Covered Not Covered Covered Covered War Not Covered Not Covered Covered Covered Forced Abandonment Not Covered Not Covered Not Covered Covered Nuclear, 5 Great Powers Not Covered Not Covered Not Covered Not Covered TRIGGER MARSH May 10, 2017 POLITICAL RISK 9 Political Risk Insurance Political Risk Perils Perils Coverage Expropriation Acts by the host government interfering with fundamental ownership rights of the insured's investment including, but not limited to, confiscation and nationalisation. Forced Divestiture Requirement by insured's own government to permanently divest of all of a shareholding in the foreign enterprise. Forced Abandonment Abandonment of a foreign enterprise as a result of advice by the home or a relevant region because of political violence. Inconvertibility / Non-Transfer Delay or inability of a foreign enterprise to exchange local currency into hard currency/to repatriate funds to the insured parent corporation. NonRepossession, Deprivation Refusal or failure of the foreign government to allow the insured to exercise its right to repossess the insured equipment, in accordance with the terms and conditions of the agreement, or to remove the equipment or commodity from the foreign country. MARSH May 10, 2017 11 Political Risk Perils Continued Perils Coverage Contract Frustration/ Repudiation Losses resulting from a cancelled or frustrated contract as result of political events in the host country, including nonpayment due to political action or inaction. Structured Credit Financial losses resulting from a private or public borrower's failure to make scheduled payments on an insured loan. Business Interruption Consequential financial losses to a non-financial corporate insured directly resulting from the insured's business operations having been interrupted by political violence or expropriation. Political Violence Physical damage to investments and assets located overseas caused by political violence (war, civil war, revolution, insurrection, strikes, riots, sabotage and terrorism). MARSH May 10, 2017 12 BROADENING PRI COVER FOR FOREIGN ASSETS & OPERATIONS 6 5 4 3 2 1 CURRENCY INCONVERTIBILITY AND NON-TRANSFER COVERAGE “PV”, “FA” PLUS CONFISCATION, EXPROPRIATION OR NATIONALIZATION OF THE OVERSEAS OPERATION (“CEN”) INCLUDING BREACHES OF LICENSES, CONCESSIONS OR MAJOR PROJECT AGREEMENTS EXPROPRIATION COVERAGE FORCED ABANDONMENT COVERAGE (“FA”) POLITICAL VIOLENCE COVERAGE (“PV”) SABOTAGE & TERRORISM COVERAGE (“S&T”) “CEN”, “PV”, “FA” PLUS RESTRICTIONS ON CONVERSION OF LOCAL CURRENCY INTO USD FUNDS, OR ON TRANSFER OF THOSE FUNDS OFFSHORE (BLOCKING DIVIDEND, DEBT SERVICE OR OTHER REMITTANCES). “PV” PLUS ABANDONMENT FOLLOWING CESSATION OF OPERATIONS AS A RESULT OF POLITICAL VIOLENCE “S&T” PLUS COVERAGE FOR INSURRECTION, REBELLION, CIVIL WAR, REVOLUTION & COUP D’ETAT AND WAR “SRCCMD” PLUS COVERAGE FOR SABOTAGE & TERRORISM STRIKE, RIOT, CIVIL COMMOTION & MALICIOUS DAMAGE COVERAGE (“SRCCMD”) MARSH May 10, 2017 13 BIG PICTURE: MARKET FOR TRANSFER OF “POLITICAL RISK” ‘Broader’ political risks have long been excluded by property insurers. A range of markets offer solutions to either specific perils or the full range of political risks. Standalone terrorism insurance market used to ‘write back’ the post Sep. 11, 2001 exclusion Insurance market categorisation of ‘political’ risks MARSH 5/10/2017 Investments and Operations: Insured Events Confiscation, Expropriation, Nationalization Selective Discrimination Forced Divestiture Cancellation/ breach of License or Concession Expropriation Full Political Violence Forced Abandonment MARSH PROTECTING YOUR CROSSBORDER INVESTMENTS & OPERATIONS May 10, 2017 Business Interruption Exchange – Transfer Risk Arbitration Award Default (Gov’t Breach of Contract) 15 Benefits of a Political Risk Policy • A PRI Policy provides risk transfer of catastrophic loss scenarios that can damage a companies balance sheet and P&L. • Political Risk Insurance can provide corporate stakeholders – owners, shareholders, senior management and directors, with comfort that unforeseen risks in emerging country operations are contained. • PRI may improve lending arrangements for the parent company’s international operations. • PRI can soften perceptions of investors that a company is taking on too much political risk, thus impacting the stock price. • Policies may be structured to address one country alone or a portfolio of countries. MARSH May 10, 2017 16 Claims data and scenarios Claims scenarios Expropriation 2002 Egypt A group of US investors filed for an arbitration suit relating to the expropriation of their interest in the cotton industry 2006 Bolivia A Spanish owned electricity company was expropriated 2006 Bolivia Colquiri mine, owned by Glencore was expropriated and nationalised 2008 Venezuela A fleet of oil rigs owned by an American company were expropriated 2009 Democratic Republic of Congo Having already had their mining license cancelled, the mine was then expropriated from its Canadian owners 2012 Bolivia A Canadian mining company had its mine expropriated and nationalised 2012 Egypt A Saudi fruit and vegetable firm was expropriated 2013 Argentina Argentina's airport regulator forced a Chilean owned airline to vacate its maintenance hanger at one of the airports in Buenos Aires Nationalisation 2006 Bolivia After expropriation, the Colquiri Mine was nationalised MARSH 2006 Bolivia A Spanish owned electricity company was nationalised 2008 Venezuela A Spanish owned bank was nationalised May 10, 2017 2008 Bolivia An Italian telecommunica tions company had its Bolivian arm nationalised 2011 Venezuela A decree of order was forced reserving the rights of all gold extracted within Venezuela 2012 Argentina A Spanish owned energy company, the largest in Argentina, was forced to sell 51% of its stake to the government 18 Thank You Maxwell Chiyangwa Surety & Political Risk Practice [email protected]
