Navigating the Volatile Political Risk Insurance Market

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By Russ Banham

RIsk Management magazine

With intensifying geopolitical tensions imperiling the financial stability of many multinational companies, it has become increasingly difficult to purchase political risk insurance to offset extreme government actions like asset expropriation, currency inconvertibility and sovereign debt defaults. Several factors, including the rise of autocratic regimes across Latin America, a new “coup belt” emerging in Africa, and a record number of elections across the world in 2024, are combining to negatively affect the availability of political risk insurance and related coverage terms, conditions and limits.

Other recent events like the assassination attempt of Slovakia’s Prime Minister Robert Fico, a disputed presidential election in Venezuela, a simmering territorial dispute between Mexico and Ecuador, and conflict across the Middle East involving Israel exemplify deepening political risk concerns.

“We’ve seen a string of recent coups in Africa and growing authoritarianism in Latin American countries, some countries like Honduras recently denouncing the ICSID Convention, and a growing inability to rely on international laws to resolve disputes are creating turmoil for CFOs and risk managers,” said Laura Burns, senior vice president and head of political risk for North America at Willis Towers Watson (WTW). ICSID (International Centre for Settlement of Investment Disputes) is a multilateral treaty and forum for the arbitration and enforcement of international investment disputes.

These and other events collectively make political risk a greater concern for organizations. In a Beazley survey of more than 3,500 business leaders, 30% said that that political risk is the biggest threat they face in 2024. In a Federation of European Risk Management Associations survey, 850 risk managers from 21 countries listed political risk as the top risk.

As political risk increases around the world, key conflict regions are impacting the political risk insurance market and emerging as important areas of focus for risk professionals:

Flashpoint: Eastern Europe

Russia invaded Ukraine over two and a half years ago and fears of a Russian victory have led to increased demand for political risk insurance for companies in neighboring regions across Eastern Europe.

“The invasion exacerbated concerns over billions of dollars of assets seized by Russia, including hundreds of leased Western aircraft,” said Marc Wagman, managing director of the U.S. credit and political risk practice at Arthur J. Gallagher. “There is a significant amount of litigation tied up with the aircraft leases and other seized assets. We saw a surge in demand for political risk insurance in Poland, Romania, Czech Republic and Hungary.”

In July 2023, Russia seized eight breweries owned by Danish brewer Carlsberg. This ultimately led the company to take a $1.5 billion write-down on its Russian assets, a possibility that seemed remote just a few years earlier.

“The market for political risk insurance was caught unaware [by the invasion of Ukraine], even though Russian troops were massed on the Ukrainian border for some time,” said Stephen Kay, managing director of structured credit and political risk at Marsh. “Now the claims are just hitting the political risk market.”

While demand for political risk insurance is higher across the Balkan states, Kay said coverage is constrained by how close a country’s border is to Russia. For example, when assisting a client that was planning a large real estate development in Hungary and another looking to build a large industrial plant in Poland, Kay was specifically asked about the planned project’s proximity to Russia.

Burns attributed the market response to concerns over a possible invasion or regime change. This risk intensified in August when Ukraine successfully launched an incursion into Russia’s Kursk Oblast region. “There is quite a bit of caution about the risk of an emboldened Russia and how that might manifest in the Balkan states,” she said.

As for Russia itself, Wagman said the country is “so heavily sanctioned, no company wants anything to do with it,” meaning there is no demand for political risk insurance.

Flashpoint: Middle East

The attack by Hamas in Israel on October 7, 2023, followed by Israel’s subsequent attacks in Gaza and the new, ongoing conflict across the region continue to adversely affect the market for political risk insurance in Israel. “That is not to say that Israeli risks are entirely off cover,” Wagman said. “We work with a number of companies in the Middle East and coverage is available, albeit with prices commensurate with perceptions of increased risk.”

However, according to Kay, there is little to no appetite in the political risk markets for new coverage in Israel. While companies doing business in Lebanon are completely shut off from obtaining the coverage, demand for the insurance is high in other countries whose locations are proximate to the war. For example, companies doing business in Egypt are concerned that the country may downgrade its diplomatic ties with Israel, straining 45 years of peace between the nations.

“Egypt is pretty close to the conflict area, but the political risk markets are able to distinguish [the extent of risk] and make discriminating judgments,” Kay said. “For example, we are closing a deal to provide political risk coverage on a $110 million renewable energy project in Egypt.” He added that coverage is “definitely possible” in other countries in the region, like the United Arab Emirates, Saudi Arabia and Oman.

Wagman agreed that political risk coverage is still available in the region, despite its proximity to the conflict. “One would think that countries a stone’s throw away in the Persian Gulf like the Emirates, Bahrain and Saudi Arabia would be vulnerable [and unable to obtain political risk insurance], yet the support within the insurance markets remains,” he said.

Flashpoint: Africa

Multiple coups have occurred in West Africa, Central Africa and the Sahel region since 2020, including Gabon, Niger, Sudan, Burkina Faso, Guinea, Chad and Mali. Many coups are underpinned by unpopular cuts in government spending, resulting in a broad shift away from democracy. When coups occur, there is increased risk of sovereign default—the failure or refusal of a government to pay back its debts in full or when due. This creates economic risks like currency devaluation and inconvertibility for global businesses.

In the past three years, sovereign defaults have occurred in Ethiopia, Zambia and Ghana. As of April 30, 2024, the International Monetary Fund (IMG) reported 25 African countries were at a high risk of debt distress and are struggling under an unsustainable debt burden. The varied stressors challenge foreign investors, with banks and other lenders demanding that political risk and trade credit insurance be in place before committing to large energy infrastructure projects.

“High-profile sovereign defaults in countries like Zambia and Ghana have reduced the availability of contract frustration coverage in much of sub-Saharan Africa,” Wagman said. “Consequently, most insurers have, at best, limited capacity for that type of cover on the continent.” 

While coverage for asset expropriation and political violence is still available across much of Africa, there are “sub-regions within insurable countries that most insurers will not touch due to ongoing civil strife and/or lawlessness,” Wagman said, citing areas within the Democratic Republic of the Congo and Mozambique as examples.

Flashpoint: Latin America

Political risk underwriters are increasingly concerned by the rise of populism in emerging markets across Latin America (comprising South America, Central America, Mexico and the Caribbean islands). A key factor is declining economies across the region. The IMF recently projected that the Latin American economy would grow at a meager 2.8% rate this decade through 2028, with countries like Brazil, Chile, Colombia, Mexico and Peru experiencing less growth than in previous decades. When economic prospects decrease, the risk of authoritarian rule rises, increasing political risk.

“With elections comes the risk of populist rhetoric,” Burns said. “Whether it is Argentina, Brazil or Chile, we could see [candidates] double down on the populist playbook. When one does it, other leaders learn from it.”

In addition to Venezuela’s recently disputed presidential election, Burns also noted the country’s longstanding territorial dispute with Guyana. “Several major international oil companies are involved in offshore exploration and production activities in Guyana’s waters,” Burns said. “An escalation in tensions would adversely affect a Western presence in the region.”

Despite the potential threat, the political risk market remains “generally open” to new inquiries across Latin America. “Constraints exist for Argentina currency inconvertibility and even political violence, with some fearing a potential backlash to austerity policies [there and] in Nicaragua, Mexico, Ecuador and, recently, Guyana,” she said. “Many carriers are limiting their line size per transaction, meaning instead of offering $100 million as they once may have, they are only offering $40 million.”

Flashpoint: China and Taiwan

Brokers reserved their greatest concern for Western businesses operating in or doing business with China, partly due to the widening U.S.-China trade war. In mid-May 2024, President Biden increased tariffs on a range of Chinese imports, including semiconductors, solar cells, critical minerals and batteries. Levies had been previously raised on steel, aluminum and electric vehicles. China is expected to retaliate.

In April 2024, President Biden also signed into law a bill giving social media platform TikTok’s parent company ByteDance 270 days to divest the application or face a nationwide ban in the U.S. China retaliated the following month, announcing that messaging apps WhatsApp, Signal and Threads must be removed from app stores in the country. China claimed the apps were “security concerns,” essentially the same argument the United States made about TikTok. Apple immediately complied and the apps are no longer available in China. 

The United States has also issued 117 punitive sanctions against Chinese officials, government agencies and companies, particularly technology companies. The growing geopolitical tensions have shaken the political risk insurance market.

“If someone told me two and a half years ago that Western companies with assets in China would find it impossible to buy a standalone political risk cover in the country, I would have laughed,” Wagman said. “Geopolitical tensions between China and the United States have never been higher.”

Given the multi-year nature of political risk insurance policies, underwriters are most concerned about the prospect of a Chinese invasion of Taiwan. In February 2023, CIA Director William Burns commented during a House Intelligence Committee hearing that China’s President Xi Jinping had instructed the country’s army to be “ready by 2027 to conduct a successful invasion” of Taiwan. “That does not mean that he has decided to conduct an invasion in 2027 or any other year, but it is a reminder of the seriousness of his focus and his ambition,” he said.

At present, political risk coverage in China is virtually unobtainable. “For several years, I visited a client asking if they were interested in buying political risk insurance in China, which was their main exposure, and they hemmed and hawed,” Kay said. “Last year, they called me and said, ‘We want to buy $1 billion of limit in China, can we get it?’ That is the tragedy of political risk insurance—by the time you need it, you can’t get it.”

The lack of political risk coverage for China has spilled over to affect the supply of insurance in Taiwan. “Insurers are retreating to a large degree in Taiwan, although it is not quite as closed off as it is in China,” Wagman said.

Kay connected the pullback in coverage for Taiwan to the war in Ukraine. “Before the invasion, Taiwan was considered to be a fully developed market economy and it still is, with a semiconductor industry that by all measures is massive,” Kay said. “After the invasion, people connected the dots and started suddenly asking for [political risk] coverage in Taiwan. Previously, there was little to no demand and now every company doing business there wants to buy it. We can scrape together small limits, but the days of massive limits are not available right now.”

The Impact on Political Risk Management

As geopolitical risk becomes more widespread, political risk insurance is quickly becoming necessary. “Risk managers cannot afford to pretend the world is a better place than it is,” said Dan Wagner, CEO of risk management consulting firm Country Risk Solutions. “They cannot delay doing the due diligence required in the places where they do business [to assess the extent of political risk]. No longer can you go to an underwriter and wave a magic wand and political insurance will appear. It’s not the way it works anymore.”

However, due to the increasingly fragmented nature of the risk, risk managers should approach the political risk insurance-buying process differently. For example, five years ago, risk managers could acquire full or near-full capacity from a single political risk insurance carrier. Today, coverage must be syndicated across several carriers to obtain adequate capacity.

In addition, the traditional strategy of purchasing a multi-country political risk product is no longer recommended. “We used to say to buy a policy as global in nature as you can because the marginal cost of adding more countries was extremely low or zero in some cases,” Burns said. “That is no longer the case. More risks are more risks, adding considerably to the underlying premium.”

Instead, risk managers should focus on buying insurance in the riskiest countries where they have the greatest financial concentrations, assuming coverage is available. “The goal is to protect the balance sheet in countries [whose business] you cannot afford to lose,” she said.

Risk managers should still consider purchasing multi-year political risk insurance policies and locking into the longest policy period policy possible. This way, if hostilities erupt down the line, the premium rate is locked in for the policy duration. However, if geopolitical tensions boil over, underwriters may be less willing to offer long-duration policies. “Frankly, in the current era of constant geopolitical change, multi-year policies may soon disappear,” Wagner said. “Fortunately, there are more countries where business can still be done than countries where one cannot.”

As the geopolitical outlook can change quickly, risk professionals must continually monitor the risk landscape. “It is crucial that risk managers have a long-range understanding of how the tides of risk shift and flow over time,” said Robert Hartwig, a professor of finance and director of the Risk and Uncertainty Management Center at the University of South Carolina. “That institutional memory—not just in the insurance world but also in the political world at large—tragically appears to be lost. The combination of aggressive autocracies around the world with an isolationist Republican party in the United States suggests we could be headed for an unwinding of the economic stability and integration we have enjoyed since the end of the Cold War, proving to be a messy period in geopolitical history.”

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