Worldwide Uncertainty Highlights Value of Political Risk, Trade Credit Insurance

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by Amy O'Connor

Interest in political risk and trade credit insurance is the highest it’s been since after 9/11, according to underwriters, and it’s coming from both insureds and insurers.

The Euro Zone crisis, hostilities in Arab countries, and uncertainty around the financial stability of global companies, have created a flurry of activity in this complicated segment.

Political risk and trade credit experts say that U.S. companies are recognizing the importance of being positioned around the world, as well as the need to protect their operations.

“People understand the power of the product and that they can use a product like this at a relatively inexpensive price to enhance their own expansion into markets they wouldn’t normally be able to expand into,” says Richard Maxwell, global head and chief underwriting officer of XL Group’s Political Risk and Trade Credit division in New York. “The coverage expands the breadth of what they can do and allows them to grow their business.”

Daniel Sussman, president of Ironshore’s Political Risk Unit in New York, says the insurer has had a substantial increase in inquiries and submissions for political risk and trade credit insurance from both U.S. and European-based insureds.

“Customers are buying more risk management solutions for exposures to keep their aggregate exposures in check and in a line they are comfortable with,” he says.

Trade credit insurance, which covers domestic and foreign receivables against losses, has been of particular interest for foreign vendors working with some U.S. retail companies because of economic issues. The Euro Zone crisis, specifically problems with Greece and Spain, has led to more careful underwriting by carriers, but also has caused many clients to look at insuring regions they may have otherwise overlooked.

This has also been true of political risk coverage, which typically covers losses from political violence, acts of terrorism or war.

Insurers have taken note of this increased interest and have expanded their operations because of it. In the last two years alone, C.V. Starr opened a political risk office in New York, ACE opened a political risk West Coast operation in Los Angeles, and the U.S. Government’s Overseas Private Investment Corp. (OPIC) arranged new political risk insurance for private equity fund investments in emerging markets.

Ironshore and XL are two other companies that recently enhanced their global operations by opening offices in Singapore and utilizing Lloyd’s platforms.

Ironshore received extension of class approval from Lloyd’s to underwrite insurance coverage for its Pembroke Syndicate 4000 Political Risk and War Terrorism unit in February of this year. Last month, XL received approval from Lloyd’s to write political risk and trade credit risks via XL Group’s Lloyd’s Syndicate #1209.

“Because we are in more of a global environment it is very important to be positioned around the world and have the right structure to write business where our clients are located,” says Maxwell.

Jack Lennon, vice president of commercial lines for TD Insurance, a wholesale broker that specializes in political risk and trade credit insurance in Boston, says even though the risk is huge, the product terms are favorable to carriers and coverage is priced appropriately for them to make a profit.

“Multi-line carriers underwrite these policies extremely carefully and will place a number of restrictions and exclusions on shaky countries such as Greece, Spain, and Argentina,” he says.

Lennon says most political risk and trade credit policies also have a 60 day cancellation notice that allows the carrier to withdraw coverage if they foresee problems occurring in the country. Companies do have the option to purchase a non-cancellable policy at a much higher price.

Capacity

If clients are on the fence about buying this coverage, now is the time to do so, as capacity is starting to tighten up, if just slightly.

At the end of May, trade credit insurer Euler Hermes suspended covering exporters shipping to Greece and other insurers are starting to restrict their capacity in the country as well.

Lennon says capacity is a huge concern because carriers could decide they have too much exposure in a particular country and begin to cut back.

“It is a lesson that was really reinforced by 9/11 and the massive losses from workers comp and property exposures,” he says. “The credit world really took that lesson to heart.”

Sussman says that rates are very good, considering the magnitude of the current worldwide situation, but it may not stay that way for long.

“Depending on the nature of the exposure and the nature of the insured and their particular regulatory situation, net pricing has tightened a little bit or the net margin for insurers has tightened,” he says. “But it does depend on the customer and the type of risk being covered.”

In order to spread the risk, deals are also being shared among several insurance markets, says Sussman.

However, underwriters agree the coverage is gaining steam and they hope to take advantage of the momentum. XL has plans to broaden its coverage and expand into related product lines. It is also working on initiatives that will allow it to write business in Canada, Switzerland and potentially Brazil in 2013.

Ironshore is exploring the possibility of growing its regional capabilities, but has no firm plans at this time.

“My observation is there is a lack of penetration of the product here in the U.S. and that is something that should lead to opportunity for insurers and producers,” says Sussman.


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