The PRI (Political Risk Insurance) Industry and its importance in the World of International Business:

The PRI Industry

The political Risk Insurance (PRI) industry includes three broad categories of providers and covers both export or trade credit and investment insurance. For this report, PRI refers to investment insurance. The public PRI market comprises both national and multilateral PRI providers. The private market’s PRI falls into two main categories:

i) Political risk activities similar to that of the public insurers, such as coverage for investments in developing countries against expropriation, political violence, and other such risks; and

ii) Developing country nonpayment insurance covering contract frustration and default by governments.

The National PRI Providers

The providers comprise national export credit agencies (ECAs) and investment insurance entities. They focus on cross-border trade and investment, generally for constituents in their own countries.

The Multilaterals

Multilaterals include the African Trade Insurance Agency (ATI), the Asian Development Bank, the Inter-American Development Bank, the Arab Investment and Export Credit Guarantee Corporation (Dhaman), the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), and the Multilateral Investment Guarantee Agency (MIGA). The World Bank, the Asian Development Bank, and the Inter-American Development Bank also provide risk-mitigation instruments, such as partial risk guarantees. a*

The Private PRI Market

The private market includes about 20 Lloyd’s syndicates (appendix 8) and about eight private insurance companies. The majority of private insurers are based in three insurance centers— London, Bermuda, and the United States (primarily New York City)—and several of the larger insurers have offices in Singapore; Hong kong SAR, China; Sydney; and elsewhere. As well as traditional equity PRI, the private market offers protection for a wide variety of developing-country payment risks, either for political perils alone or comprehensive nonpayment cover. Brokers play an important role in promoting and sourcing PRI for the private market. This market segment is dynamic: over the past year, some players have exited the PRI market, while new entrants have appeared.

The Reinsurers

Reinsurance companies write PRI-related coverage for both trade and investment. Reinsurance is an underlying factor driving both pricing and capacity in the private market. Some of the top reinsurers include Munich Re and Hannover Re of Germany, Swiss Re of Switzerland, and Berkshire Hathaway/General Re of the United States. ECAs and multilaterals also participate as reinsurers of PRI, although on a smaller scale.

Source: Data on national providers are from Berne Union, and data on private providers are from Gallagher London.

a* A partial risk guarantee covers private lenders against the risk of government failure to honor contractual obligations relating to private projects.

Political Risk Insurance and Its Benefits

Political Risk Insurance (PRI) captures most, but not all, noncommercial risks. It covers political events, including the direct and indirect actions of host governments that negatively impact investments and are not properly compensated for. This report focuses on investment insurance.

In addition to providing compensatory value in the event of claims, PRI can help investors access finance—often on better terms, thus increasing the tenors and size of available loans. Investors are often required to get this insurance in order to obtain financing from banks. For lenders,

PRI can provide regulatory relief from country risk-provisioning requirements. When provided

by multilateral and large national insurers, PRI can also help deter harmful actions by host gov- ernments, can help resolve investment disputes, and can provide access to best practices in environmental and social standards.

Motivations driving the public and private segments of the market are fundamentally different, which is partly reflected in the cover they are able to provide. National insurers have strict mandates from their authorities to serve constituent interests and are bound by foreign policy considerations. Multilateral providers ensure that their activities are consistent with broad developmental goals. Private providers, however, are motivated by the need to make profit. As a result, public and multilateral providers are usually able to offer longer tenors and higher capacity than can private insurers, but private providers can be more responsive to customer needs for product variations or complementary products.

The following are the political risks commonly insured by the PRI industry. There are differences in the terminology and definitions used by the various insurers, particularly between the public and private insurers.

Expropriation

PRI protects against losses caused by host government actions that may reduce or eliminate ownership or control. It covers outright confiscations, expropriations, and nationalizations, as well as losses resulting from a series of acts that over time have an expropriatory effect.

Currency Inconvertibility and Transfer Restrictions

PRI protects against losses arising from an investor’s inability to convert local currency into foreign exchange and to transfer it out of the host country. It also covers excessive delays in acquiring foreign exchange. Typically, this coverage applies to the interruption of interest payments or repatriation of capital or dividends resulting from currency restrictions. It does not cover devaluation risk.

Political Violence (War, Terrorism, and Civil Disturbance)

PRI protects against losses resulting from the damage of tangible assets or business interruption caused by war, insurrection, rebellion, revolution, civil war, vandalism, sabotage, civil disturbance, strikes, riots, and terrorism. Coverage usually applies to politically motivated acts. Certain insurers offer terrorism coverage on a stand-alone basis to supplement property insurance policies, which have largely excluded terrorism as a peril since September 11, 2001. Terrorism insurance increasingly offers cover against broader political violence risks.

Breach of Contract/Arbitration Award Default

PRI protects against losses arising from a host government’s breach or repudiation of a con- tractual agreement with an investor. Claims are usually payable only after an investor has invoked a dispute resolution mechanism (such as arbitration), has obtained an award for damages, and the host government has failed to honor the award.

Non-honoring of Sovereign Financial Obligations

PRI protects against losses resulting from a government’s failure to make a payment when due under an unconditional financial payment obligation or guarantee given in favor of a project that otherwise meets an insurer’s requirements. It does not require the investor to obtain an arbitral award. This coverage is usually applicable in situafinancial payment obligation is unconditional and not subject to defenses.

Carlos H. Barrientos

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