POLITICAL RISK INSURANCE 1
ACE Group is one of the world s largest multiline property and casualty insurers. With operations in 54 countries, ACE provides commercial and personal property and casualty insurance, personal accident and supplemental health insurance, reinsurance and life insurance to a diverse group of clients. CONTENTS Introduction 03 Expropriatory and Discriminatory Actions 04 Political Violence and Forced Abandonment 06 Inability to Export/Import 08 Inability to Convert or Transfer Currency 09 Purchasing Political Risk Insurance 10 2
INTRODUCTION Recent events in the Middle East and North Africa, the Eurozone s attempts to tackle its economic problems, ongoing geopolitical changes in Asia and the emergence of increasingly nationalist economic policies across the globe have put the political risks facing cross-border investments firmly in the news. Many investors have been caught out by the speed at which a country they previously felt to be stable turned into a place in which they could not do business. Taking a pro-active approach to tackling political risk is a prudent part of any international risk management strategy. Several of the country risks associated with operating overseas will not be covered by a standard property all risks policy or a standalone terrorism policy, but they can be covered with a Political Risk Insurance policy offered by ACE Global Markets. Our policies are designed to provide broad cover against the risk of losses arising from government action, political unrest and economic turmoil in a foreign country and can be tailored to meet the needs of different customers. This brochure highlights some of the risks facing companies that operate internationally and how insurance can protect companies against these risks. 3
EXPROPRIATORY AND DISCRIMINATORY ACTIONS Governments can take actions that deprive companies of their shareholdings in subsidiaries or deprive them of their assets in a country. Even if a government does not go to the length of explicitly taking an asset, political and economic circumstances may result in governments taking actions that restrict a company s ability to operate, breach the terms of an agreement or prevent a company from enjoying its rights in respect of an asset. Sovereign states generally reserve the right to take expropriatory action, something that is accepted by the international community providing that the state provides fair compensation to the affected party. However, problems clearly arise where the government does not accept that its action is expropriatory and deserving of compensation, or is unable or unwilling to make an adequate compensation payment. Country Argentina Sri Lanka Maldives Venezuela Democratic Republic of Congo Event Nationalization of Spanish oil firm s investment (2012) Government fast tracks a law through parliament allowing the expropriation of 37 private companies (2011) Expropriation of international airport operated by an Indian company(2012) Numerous expropriations of companies and assets across many industry sectors from processed food to natural resources (2002 2012) Licence Cancellation and expropriation impacting major copper producers (2009/10) High profile expropriatory actions During the middle decades of the 20th century, nationalisations and expropriations were relatively common as newly independent nations sought to take greater control over their economies. However this should not be seen as a historical phenomenon. Recently there has been a surge in this kind of activity with a number of expropriations hitting the headlines. Some high profile examples are given in the following table. Events such as those in the table make the news partly because of the prominence of the companies involved and partly because of the expropriating government s desire to publicise the issue as a political victory. However, for every expropriatory act that gets significant main-stream news coverage there are many more that remain out of the public eye. 4
Political Risk Insurance can protect companies operating internationally against the negative effects of arbitrary government action. Who s next? Whilst the natural resources and utilities sectors and companies operating in Latin America and Africa might have borne the brunt of the most recent expropriatory actions, the risks of operating in other sectors and geographies should not be underestimated. As the volume of cross border investments continues to expand in a world where geo-politics is becoming ever more complex, it is only reasonable to expect the number of companies affected by expropriatory and other politically motivated government actions to increase. How can insurance protect you? Political Risk Insurance can protect companies operating internationally against the negative effects of arbitrary government action. The important thing to remember is that cover is far more widely available and terms far more attractive before the investment climate deteriorates and the country of risk is in the press for taking action unfriendly to investors. Specific perils that can be covered include: Confiscation, Expropriation and Nationalisation Selective Discrimination Forced Divestiture License Cancellation and Breach of Contract The appropriate claim payment will depend on the nature of the insured and its exposure: Insured Corporate Equity Investor Loss Scenario Government action deprives the Insured of its shareholding in the foreign enterprise or restricts the operation of the foreign enterprise Government action deprives the insured or the foreign enterprise of physical assets Potential Claim Amount Tailored to meet the insured s requirements but often a measure of tangible book value. Replacement cost or book value of the assets that are lost Contractor or Commodity Trader Bank or Corporate Lender Government action deprives the insured of equipment or inventory Borrower is unable to repay the loan as a result of the government s action Replacement cost or book value of the equipment or inventory that is lost. The amount of the debt that could not be repaid as a result of the government s action 5
POLITICAL VIOLENCE AND FORCED ABANDONMENT As companies look for the sales growth, cost savings or scarce resources that can only be found in emerging markets, the chances of them being impacted by Political Violence increases. Illusion of Stability Many parts of the world are affected by ongoing conflicts or unrest, and for companies operating in those territories the purchase of insurance to protect against political violence is an obvious choice: the risk of operating in places like Nigeria or Colombia is readily apparent from past events. But investors in countries that have not suffered recent open unrest are often tricked by the illusion of stability, overlooking hidden but latent tensions that can rapidly change the security situation. Consider some recent violent events that took both investors and analysts by surprise: Where next? Events such as these highlight the need for companies to be prepared for the risk of a sudden change to the security environment that they operate in. Even when analysts can highlight underlying factors that could heighten the risks of political violence occurring in an apparently stable country, the scale and timing of unrest is incredibly unpredictable. This uncertainty only increases as long held assumptions about income, wealth and power distribution in the world are becoming increasingly challenged. Stagnating developed economies, unequal distribution of the benefits of growth in emerging economies and perceived shifts in the global balance of power all provide fertile ground for future political violence, from isolated social unrest and small scale terrorism through to inter-state conflict. How can Insurance protect you? Country Middle East and North Africa Event Violent uprisings lead to property damage, abandonment of assets, business interruption and cancellation of contracts (2011). Political Risk Insurance can protect investors against the full spectrum of political violence perils from Strikes, Riots and Civil Commotion through Terrorism and Insurrection to War and Civil War. Thailand Protests lead to widespread property damage and business interruption losses (2010). China Anti-Japanese protests motivated by disputed islands leads to damage and economic losses for Japanese businesses (2012). Mali Country cut in half by separatist/islamist uprising resulting in a military coup, after being considered for years as a beacon of stability in West Africa (2012). 6
Political Risk Insurance can protect investors against the full spectrum of political violence perils from Strikes, Riots and Civil Commotion through Terrorism and Insurrection to War and Civil War. More than just terrorism The important thing to note is that political violence can manifest itself in a variety of ways, and some insurance products are more limited than others. Buying standalone terrorism insurance may be sensible for a building owner in Manhattan or Singapore, but for a company operating in emerging markets the broader Political Violence cover that comes with a Political Risk Insurance (PRI) policy is more attuned to the risks they are actually likely to face. More than just Physical Damage Some insurance products are also likely to be restrictive in being linked to Physical Damage and Business Interruption following Physical Damage. However, when unrest or conflict hits a country, companies are often forced to leave that country as a result of the physical danger, to abandon their operations and assets, even if they have not suffered direct physical damage themselves. PRI policies explicitly protect against this Forced Abandonment risk. The appropriate claim payment will depend on the nature of the insured and its exposure: Insured Corporate Equity Investor Contractor or Commodity Trader Bank or Corporate Lender Loss Scenario Damage to or destruction of physical assets as a result of political violence Abandonment of the assets of the insured or the foreign enterprise or the abandonment of the operations of the foreign enterprise as a result of political violence Physical damage to or abandonment of equipment or inventory as a result of political violence Borrower is unable to repay the loan as a result of political violence preventing it from operating Potential Claim Amount Book value of the physical assets or their replacement cost. Business Interruption following physical damage cover available. If only certain assets are abandoned, the repair or replacement cost of the assets abandoned. Where the entire operations of the foreign enterprise are abandoned, an amount tailored to meet the insured s requirements (often a measure of tangible book value). Book value or replacement cost of the equipment or inventory The amount of the debt that could not be repaid as a result of the insured peril 7
INABILITY TO IMPORT/EXPORT Increased global political and economic competition has made the risk of export and import restrictions impacting global trade and investment far more apparent. It is a risk that perhaps was not considered much in ostensibly stable times, but which has had an expanding number of incidents in recent years. There are different types of export restriction and different motivations for them being put in place, as highlighted in the following table: In addition to restrictions of the sort outlined in the table there is a growing risk from emerging geopolitical power struggles which have the potential to be extremely disruptive to existing trade patterns. With companies dependent on supplies from their overseas production centres and resource bases, the risk of export restrictions creates considerable uncertainty for investment and trade strategies. Country Libya Ivory Coast Indonesia Event Sanctions imposed in support of popular rebellion (2011) Sanctions imposed to ensure transfer of power to new government (2010/11) Export ban for unprocessed minerals to try and increase local processing activity (2012). Similar recent laws have been enacted in many resource rich countries. How can insurance protect you? Companies operating internationally can suffer the impact of export restrictions in a variety of ways, from the loss of stocks or products intended for export through to the effective loss of an entire investment. The table below gives a summary of how political risk insurance protects against different types of exposure. Argentina Bans beef and grain exports (2006/7) The appropriate claim payment will depend on the nature of the insured and its exposure: Insured Corporate Equity Investor Contractor or Commodity Trader Bank or Corporate Lender Loss Scenario Cessation of operations because exports are crucial to the business Loss of products that are only of realisable value if exported Loss of products that are only of realisable value if exported Borrower is unable to repay the loan as a result of the export restriction Potential Claim Amount An amount tailored to meet the insured s requirements (often a measure of tangible book value). Book value of the products or replacement cost Book value of the products or replacement cost The amount of the debt that could not be repaid as a result of the insured peril 8
INABILITY TO CONVERT OR TRANSFER CURRENCY Operating overseas may only be of benefit to companies and financiers if it is possible to remit the proceeds of that overseas business to the insured s country. A difficult economic and political environment in a country can result in restrictions on the ability to convert local currency into the insured s preferred currency or to transfer the preferred currency from the country of risk. When such exchange controls are enacted or tightened, companies may find their cash trapped overseas, potentially depreciating in value for the period it is trapped. The table opposite gives some examples of countries where the imposition of exchange restrictions have impacted investors. Political Risk Insurance can protect companies operating internationally against Currency Inconvertibility and Transfer risks. Country Argentina Iceland Venezuela Event As the economic situation deteriorates, the government freezes bank accounts and introduces capital controls before forcibly redenominating contracts and deposits into local currency (2001/2) Capital controls introduced in response the global financial crisis (2008 onwards) Broad restrictions on access to hard currency (2003 onwards) The appropriate claim payment will depend on the nature of the insured and its exposure: Insured Corporate Equity Investor Contractor or Commodity Trader Bank or Corporate Lender Loss Scenario Restrictions on foreign exchange cause an inability to remit funds constituting dividends, shareholder loan payments, intercompany payables or proceeds of sale Restrictions on foreign exchange cause an inability to receive hard currency funds to settle a payment due under a contract Restrictions on foreign exchange cause an inability to receive hard currency funds to settle a payment due on a loan Potential Claim Amount Policy currency equivalent of the amount that cannot be converted or transferred, based on the exchange rate at the date of loss Policy currency equivalent of the amount that cannot be converted or transferred, based on the exchange rate at the date of loss Policy currency equivalent of the amount that cannot be converted or transferred, based on the exchange rate at the date of loss 9
PURCHASING POLITICAL RISK INSURANCE The important thing to note is that there is nothing unique or exceptional about the countries in the examples provided in this brochure. It is easy to be lulled into a false sense of security by the appearance of stability, as many companies no doubt were in the years leading up to the crises in those countries. Once the situation in a country openly deteriorates, the availability of Political Risk Insurance capacity for that country rapidly diminishes and premium rates increase. However, when purchased in advance of problems, especially on a portfolio basis, the cover can be a very cost effective way for companies operating internationally to manage some of the risks of a politically and economically uncertain world. When purchasing Political Risk Insurance: Consider the cost effectiveness of portfolio based cover before problems arise Ensure that the perils insured against are reflective of the risks actually faced, especially in relation to political violence Always maintain a suitable coverage horizon: many corporations buy a three year policy that is cancelled and rewritten annually to ensure they are covered during an emerging crisis. Talk to us about policy structures that can help reduce premium costs whilst giving appropriate protection. Our range of Political Risk Insurance policies will indemnify the insured for losses that they may incur as a result of the perils outlined in this brochure and policy wordings can be tailored to fit a company s specific needs. With the ability to offer non-cancellable policies for up to 15 years and with limits up to US$100,000,000 for any one overseas investment, we are able to offer considerable flexibility in policy periods and policy limits to create a cost-effective solution that appropriately addresses the political risks arising from the countries that an insured operates in. ACE s Strength in Political Risk ACE Global Markets is one of the most experienced political risk insurers in the world and delivers innovative and comprehensive solutions to clients around the globe. Our strengths in Political Risk include: Regional capabilities backed by global reach Underwriting teams with a deep understanding of political and economic risks and how they relate to different industries and companies. An in-house country risk management and analysis team Long term focus on client relationships To discuss any aspect of Political Risk Insurance please contact an underwriter at your local ACE office listed on the back. 10
ACE Global Markets is one of the most experienced political risk insurers in the world and delivers innovative and comprehensive solutions to clients around the globe. 11
About ACE Group The ACE Group is one of the world s largest multiline property and casualty insurers. With operations in 54 countries, ACE provides commercial and personal property and casualty insurance, personal accident and supplemental health insurance, reinsurance and life insurance to a diverse group of clients. ACE Limited, the parent company of the ACE Group, is listed on the New York Stock Exchange (NYSE:ACE) and is a component of the S&P 500 index. ACE s core operating insurance companies are rated AA for financial strength by Standard & Poor s and A++ by A.M. Best. This rating is indicative of ACE s strong capital base and financial stability; key attributes in the business of risk. CONTACT US London ACE Political Risk and Credit ACE Building 100 Leadenhall Street London EC3A 3BP Tel: +44 (0) 20 7173 7670 Singapore ACE Political Risk and Credit 600 North Bridge Road 17-01 Parkview Square Singapore 188778 Tel:+65 6398 8673 New York ACE Political Risk and Credit 1133 Avenue of the Americas 30th Floor New York. NY 10036 Tel: +1 212 642 7889 Brasil ACE Political Risk and Credit Avenida Paulista, 1294-16 andar Sao Paulo - SP - Brasil 01310-915 Tel: +55 11 4504 4334 Offered through authorised insurers. The foregoing presents examples of the types of coverage available, and is subject to the terms and conditions contained in the policy. The information contained herein is not intended to explain or broaden coverage afforded under this or any policy or product offered by ACE. 2014 ACE Group 07/2014 617484 12