Before the Fall

A North American oil and gas driller suspended work for Petroleos de Venezuela, and for good reason—it had not been paid in more than a year. The government of Venezuela responded by taking over the company’s rigs. That came as a shock to the company, which had operated successfully in turbulent Venezuela for years.

The rigs, worth about $20 million apiece, were covered by a $50 million policy against political risk, including confiscation, expropriation and nationalization. The event triggered a claim under the policy, which was promptly filed with Marsh’s assistance. The insurer, covering what would have otherwise been a catastrophic loss to the driller that year, paid the claim.

Foreign investors in retail property in Thailand suffered a big financial loss in 2009 when government forces squared off against so-called “red shirt” political activist demonstrators in downtown Bangkok. In a violent clash, the activists seriously damaged and looted the investors’ property, a large mall. The owners filed a claim under their political risk policy, which covered losses due specifically to political violence, for damages of $100 million (the policy limit), which was less than the actual cost to replace the property. Under political violence coverage, replacement costs are paid once the property is restored. In this case, once that was done, the full claim was paid. Today the property is back in full operation.

For Stephen Kay, executive vice president for political risk insurance at Marsh, both cases were all in a day’s work. Kay’s domain is the unstable international world of risk. His worldview was recently underscored by the summer uprising of Muslims against Egypt’s ruling military establishment, which had killed thousands of protesting Egyptians. The killings defied the predictions of consultants such as Eurasia Group, which hastily assembled a conference call the morning after Egypt’s uprising began in August to discuss the fragile outlook with clients, including Kay. He recalls no earlier warning that such an outbreak could occur.

Unpredictability is part of what makes political risk insurance, or PRI, so confounding. PRI protects against all manner of woe that can befall a domestic company operating far from home: revolution and other explosive political violence as well as milder disturbances like expropriation, nationalization and suspension of trade licenses.

Political risk insurers do more than pay claims. In some cases, they advocate for them. On one memorable occasion in 2012, an executive from Marsh flew to Europe to meet the head of a large insurer threatening to deny a claim for an important client. Marsh is the carrier’s largest producer of political risk insurance and has a much broader relationship with the insurer across multiple lines. Using that influence, and impressing the importance of the client relationship and successful resolution of the claim for Marsh and the insurer, Marsh was able to remove roadblocks to processing the claim, which was paid in full.

“This type of client advocacy and exertion of influence on carriers is only possible from a broker that possesses global reach and a market presence that’s prominent enough to matter,” Kay says.

Political risk policies are highly tailored contracts. No two policies are the same, and they are often far more complex than standard policy forms. This is where the risk manager needs extensive help in preparing claims. Insurers expect clients not only to prove the occurrence of an insured event, supported by documentation, but also to show that the insured did not breach any representations and that no exclusions apply.

Finally, carriers must calculate the extent of the loss and consider the sum for which the insured is requesting payment under the policy. Since the insured’s risk manager is likely to file a political risk claim only rarely, clients should fully document their claim to make it as strong as possible.

“Seek appropriate help,” Kay advises, “and avoid missteps that could result in a decline in coverage.”

As globalization spreads, insuring against political risk has grown as well. It is one of the insurance industry’s fastest growing segments, with premiums starting around $25,000 and escalating sharply as Western high-tech companies, among others, locate more capacity in Asia and Africa. Premiums of $1 million aren’t unusual, but the average is around $500,000.

In the last six years, PRI has blossomed into a $1 billion industry. It has been fueled paradoxically by tepid economies in the more developed world because weaker economies elsewhere can generate more profits back home.

Marsh serves as PRI broker for about 30 Egyptian clients. It keeps client names confidential, but most are well-known corporate American brands that won’t talk about their risk or their coverage throughout the Middle East, North Africa, Asia or Latin America. But their claims are real. In 2011, an engineering contractor lost $60 million in unpaid debts owed by its client, the government of Libya. Around the same time, an international bank financing a government-owned shipyard in Vietnam lost $50 million when the yard declared bankruptcy and failed to repay the bank’s loan.

No new PRI has been issued for Egypt since the most recent trouble began in July—PRI generally is not issued when unrest is imminent—but plenty of older policies remain in effect. As of press time, Kay says, none of Marsh’s clients in Egypt have filed claims. But he acknowledges PRI doesn’t protect against loss of life, and claims for property loss take time to work their way through any insurance system.

The Berne Union, a syndicate of the biggest insurers, says its members have billions in policies in some of the most unstable places on Earth. Eastern Europe, South America, Africa and Asia offer attractive investment opportunities in comparison to Western economies that are mired in slow or no growth. So there is a need for covering political risk as middle-market companies, private equity firms and others look to grow in these emerging markets.

The New Frontier

Myanmar is a country transitioning toward democracy—a “frontier market,” as Myanmar’s boosters call it. Now embarked on admired reforms toward liberal democracy and a mixed economy, Myanmar is on the cusp of accepting outside investment after a half-century of mismanagement under an isolated military dictatorship. Last January, Myanmar’s national chamber of commerce helped convene a “private sector investment summit.” Such PRI providers as Aon and Marsh look to Myanmar as an arena of new business, even more so if opposition political leader and Nobel Peace Prize winner Aung San Suu Kyi ascends to the presidency in 2015.

“They don’t have anything,” Kay says, “and they need everything—refrigerators, blue jeans, Starbucks coffee. Everything.”

Such countries are newcomers to outside investment, similar to parts of the old Soviet Union following its collapse in 1989. As exciting as Myanmar’s moved toward democracy is, says Curtis Ingram, vice president of Aon’s San Francisco office, it’s still not wise for any business to wade into the country without PRI.

Ingram says instability in regions such as North Africa and the Middle East can help bolster the case for providers of political risk insurance.

“It’s superb marketing for us,” Ingram says. “It pushes risk to above-the-fold in the newspaper. It makes it visible and relevant.”

Meanwhile, Venezuela exists in an uneasy state and has become, at least for now, off-market to nearly all PRI underwriters. Former Vice President Nicolas Maduro, narrowly elected in April to succeed Hugo Chavez, who died of cancer in January, has struggled to hold on against radicals, soldiers and Cuban spies. Whether he survives December elections is questionable.

Of greater concern to insurance carriers is North Africa and huge swaths of the Middle East, which are terrifying enough to the U.S. government. In August, concerned over a repeat of the Benghazi disaster and threatened attacks by al-Qaida in Yemen, the State Department briefly shut down 19 diplomatic posts in the Middle East and Africa.

Fixed premium PRI is non-cancelable. “There are 15-year policies still in effect in Venezuela,” Ingram says.

Anne Marie Thurber, executive vice president and managing director of PRI for Zurich North America, recommends clients obtain coverage immediately when entering an unstable area. And if they are there now and have no coverage, she says, they should buy some.

“Once the revolution has begun,” Thurber says, “it’s too late.”

Read More Until the Next Uprising…  There’s still coverage available for your clients’ business abroad.