The world may be becoming increasingly unstable – but that isn’t the only reason why political risk coverage is in higher demand in Canada.
Banks increasing their lending in emerging economies, or mining and energy companies entering unstable countries for resource extraction are the main drivers of demand according to Richard Abizaid, XL Catlin’s political risk and trade credit leader for the Americas.
“For Canada, what’s really driving the demand is not so much increased geopolitical risk but, from a bank’s perspective, more an awareness of what the private political risk market can offer, how it can provide solutions to them that they didn’t previously have,” Abizaid said. “Canadian banks, traditionally, when they’re selling down their risks, they’re selling to other banks.
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“With the insurance market now being able to support these domestic transactions in the non-trade and project financing space, they have an alternative distribution channel to lay off this risk. This is a fairly new development in our market. We haven’t been always been able to offer this product.”
Abizaid said political risk insurance is broker-driven but there aren’t many brokers who focus on it. The coverage is for everything from governments unexpectedly seizing property to political violence where investments are interrupted or are forcibly abandoned.
“If you look at what’s happened in Ukraine, with the rebels, there are certain parts of eastern Ukraine that are not safe to operate in. Because of the political violence there, it has forced investors to abandon their investments and that’s what’s covered,” Abizaid said. “Under political violence there’s also business interruption covering up to 12 months of lost business income due to damaged assets.”
Then there’s more routine instability indemnification for issues like governments seizing property, government bodies not paying for resources and currency inconvertibility where local currency can’t be repatriated or transferred into dollars.
Though political risk insurance is in general a contemporary product, the need for instability coverage has been becoming increasingly apparent. XL Catlin, which just launched its Canadian political risk product, said it offers 15 year policies and covers transactions with a $200 million limit.
“There’s a general consensus that geopolitical risk has increased and has been increasing over the past five years,” Abizaid said. “That’s a general statement. The threat and political risk market has, since the financial crisis, paid substantial claims, which would support that heightened geopolitical risk.
“In political risk insurance, the customers that we’re talking about are primarily corporates in the energy sector investing in pretty challenging countries or geographies, which they tend to do because that’s where the minerals and oil and gas are.”
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