RECENT TRENDS
IN PUBLIC
POLITICAL
RISK INSURANCE
COVERAGE
The riskiest countries in the rankings r emain the ones most
af fected by natural disasters or high levels of conflict.
M I C H A E L D . N O L A N , F R ÉD ÉR I C G I L L E S S O U R G E N S A N D C H R I S T I N A TOT I N O
O
.................................................................
ver the past decade, political risk products available
to investors have changed
and grow n. These changes
can b e att r ibuted to curr e nt , w o r l d w i d e e ve nt s , w h i c h h ave
resulted in the chang ing needs and
demands of businesses and companies with
regard to political risk insurance coverage.
In fac t, according to the Insur ance
Journal, “the current events in the Middle East have brought political risk back
to the fore of global investors and markets.” 1 Similarly, in Africa, “the demand
for political risk insurance has also surged
i n l i g ht of i nc re a s e d deb t prote c t ion
co s t s a nd y ields on gover n ment debt
across the Gulf region,” and also in light
of “p ol it ic a l ins t abi l it y.” 2 Eu romone y
repor ts that “the r isk iest count r ies in
the rankings remain the ones most
affected by natural disasters or high levels of con f l ic t , i nclud i ng t he C e nt r a l
African Republic, Democratic Republic
of Congo, North Korea and Haiti.” 3 Thus,
although there may be disagreement on
where political risk is greatest, there can
be no doubt that there is a grow ing need
globally, for political risk insurance.
These events had a quantifiable and
i m m e d i at e i mp a c t . Ac c o r d i n g t o t h e
Insurance Journal, “[e]merging markets,
which experienced improvements across
MICHAEL D. NOLAN is a partner in the Washington, DC office
of Milbank, Tweed, Hadley and McCloy LLP. He can be reached
at [email protected] or 202-835-7524.
FRÉDÉRIC GILLES SOURGENS is an associate in Milbank,
Tweed, Hadley & McCloy’s Litigation Group located
in the Washington, DC office. He can be reached at
[email protected] or 202-835-7566.
CHRISTINA TOTINO is an associate in the Washington, DC
office of Milbank, Tweed, Hadley & McCloy LLP. She can be
reached at ctotino@milba nk.com or 202-835-7567.
MAY/JUNE 2011
CORPORATE FINANCE REVIEW
13
.......................................................................................................................................................
THE POLITICAL RISK
INSURANCE MARKET
HAS REACTED TO
CHANGING NEEDS.
all major risk indices in 2009, suffered
a reversal in 2010 w ith expropr iat ion
and creeping expropriation (‘ECE’) and
legal, regulator y and licensing (‘LRL’)
risks on the rise across all regions except
Eastern Europe. Resource nationalism,
especially in the energ y sector, was a key
driver behind this trend, pushing Alliant’s
ECE and LRL global indices down by 3.5
p oint s in t he las t 1 2 mont hs .” 4 T he s e
changes prov ide a b enchmark for the
increased demand for new products from
political risk insurance carriers.
Current events also showcase one of
the major advantages of polit ical r isk
insurance compared to other risk mitig at i o n t o o l s : s p e e d . D i s c u s s i n g
ongoing events in Libya, one comp a ny n o t e d t h at i t h a d a l r e a d y
received compensat ion for al l of
its political risk-related losses from
its insurance prov ider. Even as events
deteriorated, the same business expected
that all future losses would be covered
w ith the same speed. 5
But a key concern has been whether
the current political risk insurance offering in fact fits the need of companies
investing in the contemporar y political
risk landscape. Many political risk insurance products were first drafted to deal
w ith fundamentally different challenges
in the 1950s and 1960s. Although some
of the same themes remain—resource
nationalism, political violence and potential foreign currency shor tages to name
a few—the manner in which they manifest today may in many instances have
changed w ith the times.
The political risk insurance market has
reacted to changing needs. Both major
public sector insurers like the Overseas
Private Investment Corporation (‘OPIC’)
and the Multilateral Investment Guarantee Agency (‘MIGA’), and private sector prov i d e r s cont i nu e to of fe r n e w
products. 6 The private market in particular has been able to attract a growing number of clients w ith its current offerings.
Political risk insurance
in the public market
OPIC and MIGA are fine tuning their
respective portfolios to respond to mar-
14
CORPORATE FINANCE REVIEW
MAY/JUNE 2011
ket demands. OPIC in 2003 expanded
its tested staple of coverage of expropriation, political v iolence, and inconve r t i b i l i t y c ove r a g e w i t h i n s u r a n c e
offerings for terrorism related damage.
How e ve r, O P I C ’s t e r ror i s m c ove r a g e
s e e m s t o e xc lu d e w e a p o n s o f m a s s
destr uct ion damage. This may lead to
some uncertainty of how the coverage could
be applied in practice if there is a major
terrorist event.
OPIC’s coverage currently also includes
special coverage, such as inst itutional
loans, capital markets, leasing, oil and gas,
natural resources, and contractors and
exporters. Most recently, OPIC expanded
its coverage to faci lit ate and mit igate
risks associated with renewable resource
projects. 7 Specifically, OPIC is prov iding insurance to reduce the r isk f rom
t he hos t gover nment “[ b ] re aching an
agreement/concession/contract with the
investor, unlaw fully revoking or denying Letters of Approva l issued by the
DNA, imposing undue burdens on carbon credit projects such as a confiscator y tax on the sale or transfer of the
env ironmental benefits or carbon credits derived from carbon credit projects,
restr ict ing or prohibit ing the transfer
of the Cer tified Emissions Reductions,
deny ing the investor an adequate and
effec t ive for um to rev iew the lega lit y
under applicable laws of a breach of an
ag reement w ith the host gover nment,
and failing to pay an arbitral award to
the investor subsequent to a final, binding and non-appealable judicial determination that the host government is at
fault for breaching the contract w ith the
investor.” 8
MIGA similarly has updated its por tfolio in light of recent demand. Similar
to OPIC, MIGA also offers a broad range
of p o l i t i c a l r i s k i n s u r a n c e c ove r a g e .
MIGA’s website adver t ises t radit ional
coverage for currenc y inconver tibilit y
and transfer restriction, expropriation,
war, terrorism and civil disturbance, and
breach of contract. 9 On top of traditional
guarantee products, MIGA now offers a
guarantee for non-honor ing of sovereign financial obligations. The non-honoring of sovereign financial obligations
is applicable in situations where a sovPUBLIC POLITICAL RISK INSURANCE COVERAGE
Political risk insurance
in the private market
In addition to the public market for political risk insurance coverage, there is a measurable increase in demand for private
PUBLIC POLITICAL RISK INSURANCE COVERAGE
P R I c ove r a g e . 1 2 Ma ny b u s i n e s s e s a re
negotiating to expand the scope of their
political risk insurance cover to include
mobi le equipment, r igs (gas and oil),
and personal assets, such as fine ar t and
property. The scope of new coverage differs on a case-by-case basis w ith many
pr iv ate i ns u r a n ce comp a n i e s pl a c i n g
restrictions on riots and strikes coverage to balance their exposure. 13
Like the public market, over the past
decade, insurance companies in the priv ate m arke t have a ls o b e en cha ng i ng
and expanding their political risk insurance coverage. AIG Global—a leading
international insurance organization—
is now also extending polit ical r isk insurance coverage in areas such as sovereign pay ment default, which includes
failure of a sovereig n ent it y to honor
pay ment obligat ions under a promissor y note, bond, sovereig n loan or sovereig n g uar antee, and fai lure of a
sovereign entity to honor payment obligations under a letter of credit. AIG Global
also includes coverage for political v iolence to meet the demands of businesses.
Polit ical v iolence includes polit ica l ly
mot ivated ac ts of v iolence, including
terrorism, war and civil war, which result
i n p hy s i c a l d a m a g e t o p rop e r t y. 1 4 I n
addit ion, AIG Global has successf ully
offered t radit ional coverage in areas of
confiscation, expropriation and nationalization, currency inconver tibilit y and
non-t ransfer, cont rac t f r ust rat ion due
to polit ical events, and w rong f ul calling of on-demand cont rac t guarantees
and bonds.
According to the website for Chartis,
a well-known subsidiar y of AIG Global,
in order to meet w ith recent company
and business demands, Chartis has currently expanded its political risk insurance to include coverage in areas such as
sovereign payment default, which includes
the non-honoring of a promissor y note
or a sovereign guarantee and the failure
of a sovereign entity to honor pay ment
obligations under a promissor y note. 15
Chartis is also currently offering political risk insurance coverage in traditional
areas such as political violence, confiscation, expropriation, nationalization,
currency inconvertibility, and non-transMAY/JUNE 2011
.......................................................................................................................................................
ereign’s financial pay ment obligation is
unconditional and not subject to defenses.
The trigger for coverage under this produc t is binar y : it do e s not re qu i re t he
i nve s tor to ob t a i n a n a r bit r a l aw a rd .
Rather, a cer tificate that there was nonpay ment is enough to recover. 10
Traditional OPIC coverage has a proven
track record due to its significant claim
determination histor y. From the 1960s
onwards AID, and later OPIC, resolved
claims through archived—and now published—claims deter minat ions. These
determinations, addressing issues from
currency inconver tibilit y to expropriations to war, insurrection and civ il war
claims prov ide valuable insight into the
claims and pay ment histor y of OPIC.
But, as is to be expected, many of the
new OPIC products have not yet been
tested. Their true value, therefore, w ill
become fully apparent only once the first
claims are paid.
Unlike OPIC, MIGA does not have a
l o n g s t a n d i n g c l a i m h i s t o r y — ow i n g
largely to the fact that its coverage has
not been called upon as f requently as
OPIC’s. In fact, MIGA has only had to
p ay t h r e e c l a i m s
MANY BUSINESSES
since 1988, includARE NEGOTIATING TO
ing a claim in 2000
EXPAND THE SCOPE OF
THEIR POLITICAL RISK
regarding an equiINSURANCE COVER
t y i nve s t m e nt i n
TO INCLUDE MOBILE
P.T. East Java Power
EQUIPMENT, RIGS
Corporation in In(GAS AND OIL), AND
donesia, a claim in
PERSONAL ASSETS
2 0 0 2 re g a rd i n g a
power project in Nepal, and a claim in
2005 regarding a Toll Road Project in
Argentina. According to a World Bank
Group Repor t on MIGA from March 31,
2009, “... f rom 580 proje c t s t hat have
received MIGA support, there have been
more than 60 cases treated as possible
claims, but in which no claim has been
paid.” 11 All other potential claims could
be settled w ithout need to engage the
formal claims procedure.
CORPORATE FINANCE REVIEW
15
.......................................................................................................................................................
MANY PRIVATE
INSURERS
HAVE ALSO
BEEN PAYING
OUT CLAIMS
BROUGHT BY
BUSINESSES
UNDER
THEIR NEW
PRODUCTS.
16
fer, contract frustration due to political
events, and wrongful calling of on-demand
contract guarantees and bonds. 16
Similar to AIG Global, in order to meet
recent demands, Meridian Finance Group
(an inter nat ional insurance prov ider)
current political risk coverage includes
“creeping” expropriation, where a series
of individual government actions which,
taken together, effectively result in expropriation, and political v iolence. 17 While
Meridian Finance Group does not currently offer political risk insurance coverage for sovereign defaults, Meridian
Finance Group does include, like most
other pr ivate insurers, r isk insur ance
coverage for polit ical v iolence. 1 8 This
kind of political risk insurance protects
against “... non-pay ment, loss of income,
bu s i n e s s i nte r r up t i on , l o s s of e qu it y
invest ments, or damage/dest r uc t ion of
physical assets due to political violence.
Covered political risks include war, revo lu t i o n , c i v i l u n re s t , r i o t i n g , p u b l i c
st r ikes, ar med upr ising , insur rec t ion,
terrorism, sabotage, acts of malice,
or other polit ical v iolence.” Such coverage in polit ical r isk insurance coverage meet the demands of current events. 19
In addition to the newer products being
offered, Meridian Finance Group is also
s t i l l of fe r i ng p ol it ic a l r is k i nsu r a nce
coverage in t radit ional insurance areas
su ch a s ex propr i at ion of a s s e t s , c u r renc y inconver t ibilit y, cont rac t repudiation, w rongful calling of guarantees,
and non-deliver y by foreig n supplier. 2 0
Zurich Emerging Markets Solutions
(‘Zurich’), a private Sw itzerland-based
polit ical r isk insurance prov ider, like
the pr ivate insurers already discussed
and according to its website, has expanded
its polit ical r isk insurance to include
coverage in areas such as the non-honoring of sovereign guarantee insurance. 2 1
Zurich also maintains political risk insurance coverage in traditional areas such
as political violence, expropriation, and
currency inconver tibilit y.
Aon, a private Taiwan-based political
r i s k i nsu r a nce prov ide r — i n orde r to
meet more t imely demands of businesses—has expanded its political risk
insurance in the areas of war and political v iolence as well. However, like most
CORPORATE FINANCE REVIEW
MAY/JUNE 2011
private political risk insurance providers,
Aon still currently offers political risk
insurance coverage in traditional areas
such as non-payment products for financial institutions, expropriation, cancellat ion of operat ing licenses, exchange
t ransfer problems, impor t and expor t
embargo es, and non-repossession for
global cor porations. 22
Lastly, Sovereign Risk Insurance, Ltd
(‘Sovereign’), an international, leading
under w riter of political risk insurance
(like the pr ivate insurers already discussed in this rev iew) in order to meet
recent demands, has expanded significantly its polit ical r isk insurance and
includes coverage in areas such as sovereign and sub-sovereign non-pay ment
and political v iolence. 23 According to a
recent news ar ticle, Sovereign expects
to face numerous claims because of the
recent Eg y ptian upheaval and political
v iolence taking place in Eg y pt. 24 Sovere i g n , l i ke m o s t pr i v at e p o l i t i c a l r i s k
insurance prov iders, also offers political risk insurance coverage in the trad it iona l are a s such a s ex propr i at ion ,
currency inconvertibility/exchange transfer, unfair calling of bonds, non-repossession of aircraft or mobile equipment,
and other customized coverage including embargoes and license cancellations. 2 5
In addition to offering new products
for p olit ic a l r isk insur ance cover age,
many pr ivate insurers have a ls o b een
pay ing out claims brought by businesses
under their new products. 26 While much
of t h e i n for m at ion re g a rd i ng pr iv ate
insurer claim histor y is not made public, some of the private insurers made
such claim p ay ment s k now n on t heir
websites.
For example, in 2009, Zurich Emerging Markets Solutions (‘Zurich’) paid a
total of nine claims alone. 27 One claim,
in the Ukraine, was for $85,000,000 where
“lenders financed the sale of commodities and other items to buyers supported
by letters of credit from Ukrainian banks
... [and the] lenders suffered losses when
the Ukrainian banks were unable to meet
their obligat ions due to the effec ts of
the global credit crisis.” 28
In another claim, Zurich paid a claim
of $ 3 , 0 0 0 , 0 0 0 w here a “m a nuf ac t u rer
PUBLIC POLITICAL RISK INSURANCE COVERAGE
New products meeting market need
The developments in political risk insurance, as discussed by this review, remain
significant. The changes in the demands
fo r p o l i t i c a l r i s k i n s u r a n c e c ove rage not only reflect
THE NEW PRODUCTS
t h e m a r ke t n e e d
OFFERED CAN
for such products,
HAVE SIGNIFICANT
BENEFITS FOR
but also reflect the
BUSINESSES IN LIGHT
demands of busiOF WHAT IS GOING ON
nesses and compaIN THE WORLD TODAY.
n ie s , w ho a re re acting to current worldw ide events and
political turmoil.
The new produc ts offered can have
significant benefits for businesses in light
of what is going on in the world today.
The new products also seem to be meeting the current market need and demand
as well. For example, on March 10, 2011,
the OPIC board approved $250 million
in insurance to provide medical equipment for hospitals in Ghana. 32 Currently,
throughout Africa, many countries are
experiencing unrest from political instability. 33 Political Risk Insurance coverage,
offered in both the public and private
sectors, in areas such as political v iolence, or sovereign defaults can be especia l ly helpf ul to proje c ts in Af r ic a to
insure against the political instabilities.
As mentioned earlier in this rev iew,
OPIC has a ls o re cent ly b e en of fer ing
f a c i l i t at i n g f i n a n c i n g f o r r e n e w able resource projects. For example, on
March 10, 2011 the OPIC board approved
$58 million for a hydropower project in
Georgia. 34 The new products being offered
PUBLIC POLITICAL RISK INSURANCE COVERAGE
.......................................................................................................................................................
sold telecommunications equipment to
a Boliv ian customer who installed some
of t he e qu ipment for a gover n ment a l
e nt it y i n E c u ador. Whe n t he gove r n mental entity failed, the Bolivian customer
was unable to repay in accordance w ith
the contract w ith the manufacturer.” 29
B e t we en 1 9 9 9 a nd 2 0 0 5 , S ove re i g n
Risk Insurance Ltd. (‘Sovereign’) paid
a total of five claims. 30 For one claim,
Sovereign paid a claim to three European
commercial banks for a defaulted scheduled pay ment on an expor t finance loan
to the Gover nment of the D ominican
Republic. 31
in areas such as polit ical v iolence, or
sovereign defaults can also be especially
helpful to insure such projects against instabilities in nations abroad and meet the
n e e d s o f t h e m a r ke t f o r r e n e w a b l e
resource projects.
Businesses are currently purchasing
political risk insurance to insure their
projects against uncontrollable turmoil
in count r ies abroad. China Gezhouba
Group Co., Ltd. purchased political risk
insurance to insure its house building
project against any political instability
in Libya, for example. 3 5 The abilit y of
political risk insurers, in both the public and private sectors, to update, and
e x p a n d cove r a ge to m e e t bu s i n e s s
demands is ver y impor tant in light of
current worldw ide events.
One timely point to consider in light
of Japan’s recent natural disaster, is regulator y change in the wake of natural
disasters. C er t ain reg ulator y changes
instituted in response to such disasters—
such as those involv ing energ y or natural resources—can impair investments
w ithout constituting an expropriation.
In such instances, entering into a bilateral investment treat y and actual treat y
c ove r a g e m ay b e m ore a dv a nt a g e ou s
where the risk is less fluid. However, the
developments in political risk insurance,
as discussed by this rev iew, remain significant, as the new products are working w ith both the demands of businesses
and the needs of the market. I
NOTES
1
A ll i a n t Is s ues New Report on Insurable Risks i n
175 Countries, Insurance Journal, March 21, 2011,
http://www.insurancejournal.com/news/international/20
11/03/21/190825.htm.
2
Turmoil in the MENA Region & Increased Risk Premium Support to Exporters and Investors, African
Tr a d e I n s u r a n c e A g e n c y, 2 011 P r e s s R e l e a s e s ,
h tt p : / / w w w. a t i - a c a . o r g / p r e s s . p h p ? i d =
3 2 & y i d = 2 011 & p i d = 8 6 ; s e e a l s o T h e R e t u r n o f
Po l i t i c a l R i s k , N e w s T i m e , Fe b r u a r y 17, 2 011 ,
http://www.newstime.co.za/Business/The_return_of_pol
itical_risk/20988/.
3
Andrew Mortimer, Countr y Risk 2011: Middle East
Drops, Sub-Saharan Africa Rises, Euromoney, Februar y 23, 2011, http://www.euromoney.com/Article/
2773151/Categor y/1/ChannelPage/0/C ountr y-risk March-2011-Big-changes-afoot.html
4
A ll i a n t Is s ues New Report on Insurable Risks i n
175 Countries, Insurance Journal, March 21, 2011,
http://www.insurancejournal.com/news/international/
2011/03/21/190825.htm.
5
S e e Ya n Pe i , C h i n a ’s L i b y a n P r o j e c t s o n H o l d
I n d e f i n i t e l y, C h i n a . o r g . c n , M a r ch 2 1 , 2 011 ,
MAY/JUNE 2011
CORPORATE FINANCE REVIEW
17
.......................................................................................................................................................
h tt p : / / w w w. ch i n a . o r g . c n / b u s i n e s s / 2 011- 0 3 / 2 1 /
content_22188713.htm.
6
See Julia Kollewe, Rich Rush for Insurance Cover
Amid Middle East Turmoil, Obser ver, March 6, 2011,
http://www.guardian.co.uk/business/2011/mar/06/
insurance-middle-east-turmoil
7
O P I C , h tt p : / / w w w. o p i c . g o v / s i t e s / d e f a u l t / f i l e s /
OPICrenewableresourcesproducts.pdf.
8
Id.
9
Miga.org, Insuring Investments, Ensuring Opportunities,
http://www.miga.org/guarantees/index_sv.cfm?stid=
1547
10
Id.
11
MIGA: Mitigating Political Risks in Infrastructure
Pr o j e c t s , Wo r l d Ba n k G r o u p M u l t i l a t e r a l I nve s t m e n t G u a r a n t e e A g e n c y, M a r ch 3 1 , 2 0 0 9 ,
http://siteresources.worldbank.org/INTTRANSPORT/
R e s o u r c e s / 3 3 6 2 9 1- 12 3 4 4 5 10 4 8 011 /
5827121-1239045090161/Quintrell_MIGA.pdf.
12
Julia Kollewe, Rich Rush for Insurance Cover Amid
M i d d l e E a s t Tu r m o i l , O b s e r v e r, M a r ch 6 , 2 011 ,
http://www.guardian.co.uk/business/2011/mar/06/
insurance-middle-east-turmoil.
13
Id.
14
AIG Global, http://www.aig.com/aigweb/internet/en/
files/mkt_WS_PoliticalRisk_tcm20-14776.pdf. Such
acts of political violence mirror current situations
in countries abroad, such as in Libya and Egypt.
15
Chartis, http://www.chartisinsurance.com/politicalrisk_919_214482.html.
16
Id.
17
Meridian Finance Group, http://meridianfinance.com/
political_risk.html.
18
Id.
19
Id.
20
Id.
21
Zurich Emerging Markets Solutions, http://www.zurichna.com/
internet/zna/SiteCollectionDocuments/
en/Products/tradecredit/FinalClaimsOver view.pdf.
18
CORPORATE FINANCE REVIEW
MAY/JUNE 2011
22
Ao n , h tt p : / / w w w. a o n . c o m / r i s k - s e r v i c e s / p o l i t i c a l risk.jsp.
23
Sovereign
Risk
Insurance,
Ltd,
http://www.sovereignbermuda.com/claims_histor y/
claims_histor y.html.
24
Egypt Drives Demand for Political Risk Insurance,
Bernews, Februar y 14, 2011, http://bernews.com/
2011/02/egypt-drives-demand-for-risk-insurance/.
25
Sovereign
Risk
Insurance,
Ltd,
http://www.sovereignbermuda.com/claims_histor y/
claims_histor y.html.
26
See generally Yan Pei, China’s Libyan Projects on
H o l d I n d e f i n i t e l y, C h i n a . o r g . c n , M a r ch 2 1 , 2 011 ,
http://www.china.org .cn/business/2011-03/21/content_22188713.htm.
27
Zurich Emerging Markets Solutions, http://www.zurichna.com/
internet/zna/SiteCollectionDocuments/en/
Products/tradecredit/FinalClaimsOver view.pdf.
28
Id.
29
Id.
30
Risk
Insurance,
Ltd,
Sovereign
http://www.sovereignbermuda.com/claims_histor y/
claims_histor y.html.
31
Id.
32
O P I C , h tt p : / / w w w. o p i c . g ov / n ew s / p r e s s - r e l e a s e s /
20 09/pr031011b
33
Turmoil in the MENA Region & Increased Risk Premium Support to Exporters and Investors, African
Tr a d e I n s u r a n c e A g e n c y, 2 011 P r e s s R e l e a s e s ,
h tt p : / / w w w. a t i - a c a . o r g / p r e s s . p h p ? i d =
3 2 & y i d = 2 011 & p i d = 8 6 ; s e e a l s o T h e R e t u r n o f
Po l i t i c a l R i s k , N e w s T i m e , Fe b r u a r y 17, 2 011 ,
http://www.newstime.co.za/Business/The_return_of_
political_risk/20988/.
34
O P I C , h tt p : / / w w w. o p i c . g ov / n ew s / p r e s s - r e l e a s e s /
20 09/pr031011.
35
S e e Ya n Pe i , C h i n a ’s L i b y a n P r o j e c t s o n H o l d
I n d e f i n i t e l y, C h i n a . o r g . c n , M a r ch 2 1 , 2 011 ,
http://www.china.org .cn/business/2011-03/21/content_22188713.htm.
PUBLIC POLITICAL RISK INSURANCE COVERAGE