We invited Daniel Riordan, Managing Director of Zurich Emerging Markets Solutions, and current Chairman of the Berne Union’s Investment Insurance Committee, to discuss issues and opportunities confronting the Berne Union’s membership engaged in PRI business.
The Berne Union is the leading international organization of public and private sector providers of export credit and investment insurance. Founded in 1934 as an international non-profit organization with the aim to facilitate world-wide cross-border trade, it supports international acceptance of sound principles in export credit and foreign investment insurance and provides a forum for professional exchanges among its 50 public and private sector member companies.
Berne Union members provide a vital link in the chain of world trade by offering insurance or guarantees to protect exporting companies, investors and financial institutions against political and/or commercial risks. In 2005, they covered more than US$1,000 billion worth of business, about 10% of the world’s total export trade.
Annual meetings of the Berne Union’s entire membership and major committees, and special workshops and seminars are held around the world, providing members with opportunities to exchange views and expertise, address professional challenges and explore opportunities for cooperation. There are three major committees: Short Term (ST), Medium/Long Term (MLT), and Investment (INV) Insurance.
The INV committee promotes the exchange of information among its members who provide political risk insurance for international investors and lenders participating in cross-border investment and lending for emerging market projects. It deals with product and underwriting, risk assessment and premium methodologies, portfolio management, country and sectoral analysis, marketing and distribution techniques, organizational developments, claims and recoveries, and global trends and developing issues. Not surprisingly, nowadays it has a lot on its plate that is of interest to users as well as providers of political risk insurance. Some key issues currently being discussed among members include:
- Expropriation Risks: Market conditions are of interest to all members, and views are shared on a variety of different countries and issues. One topic of high interest is rising concern about expropriation risks in Latin America (Venezuela, Bolivia, and Ecuador), Eastern Europe (Russia) and Asia (Thailand). The rise of populist-leaning governments in Latin America, particularly troubling to many infrastructure investors, has led to a spike in interest in political risk products.
- Establishing Best Practices: There are efforts within the Berne Union to establish “best practices” for policy and coverage wordings, for example with respect to expropriation coverage. Some members feel that there is a need to provide greater clarity on policy wording and coverage definitions. This is challenging, given that the industry typically offers policies that are heavily manuscripted from template wordings. Coverage for expropriation will be a particular focus in 2007.
- Political and Commercial Risks: The expansion of political risk policies to include certain commercial risks is reflected in the significant and growing share of PRI business represented by “Breach of Contract” cover for commercial agreements between private investors and host governments, and “Non-honoring” cover for sovereign, sub-sovereign and municipal entity payment guaranties. Prudent and successful underwriting of these risks calls for expanded professional skills (for evaluating both political and commercial risks) and comprehensive research and financial modeling capabilities.
- Demand for Broader Coverage and Greater Claims Transparency: Many INV committee members are reviewing their policies and claims reporting methods to respond to increasing demands from investors and lenders, and their brokers, for broader coverage and greater transparency on claims matters. Some customers and brokers have suggested that traditional coverages and wordings may not adequately address current or potential risk events. They are also asking for detailed claims information on underwriters’ handling and reporting of claims matters. In response, many members have opted to utilize their web pages to provide evidence of their responsiveness to claims as well as details on their payment of claims. As an organization, the Berne Union is being asked to provide more transparency on claims and other data in its aggregate statistics. This will continue to be an area of concern and focus for members in 2007.
- Regulatory Risk: The risk of new regulations that may deprive investors of their rights is of growing concern to investors and insurers. As regulatory decisions can have dire consequences for some investors, there is growing demand to develop new coverage or to augment existing expropriation coverage to respond to this risk concern. What are the boundaries of this risk, and how does an underwriter provide effective coverage? These are important questions for underwriters considering this new coverage.
- Collaboration Among Insurers: Once rare, collaboration via coinsurance and re-insurance is now a common risk management practice among Berne Union members, both public and private, especially with respect to large projects. Most of this activity has involved co-insurance and re-insurance techniques, often with provisions for cooperation in claims matters, but there have also been efforts to swap risks between members to balance each other’s portfolios.
These are some of the timely and challenging matters that INV members will confront in 2007. Many of these matters will be discussed and debated with constructive outcomes at the upcoming spring meeting in Ljubljana, Slovenia, the summer Technical Panel meeting in New York, and the fall meeting in New Delhi, India. ■