A World of Risk

In emerging markets, the clash between politics and profits poses multiple threats.

Companies are demanding products that are more responsive to current threats. In some cases, they take existing policies that cover terrorism and expand them to cover other perils, such as civil war. “The baseline used to be expropriation protection — you own something, the army shows up, it’s expropriated, and you have a claim,” says Michael Nolan, a partner at Milbank, Tweed, Hadley & McCloy LLP. “But instead, let’s say the government tells you it’s going to increase taxes by 20%, pass a law requiring worker pensions, and change environmental regulations so you have to build more-expensive plants. Oh, and by the way, the only builders of those plants are local and they are politically connected,” Nolan says. “Traditionally, PRI wouldn’t perform on that.”

“Most of our bigger clients care less about the isolated riot and more about overall impacts of regime change,” Freely says. “It takes some due diligence on the client’s and underwriter’s part to write this risk.”

Governmental agencies can also be engaged to cover private investment. The Overseas Private Investment Corp., a U.S. entity, provides financing, insurance, and guarantees for investors in foreign countries. For example, in 2009, OPIC underwrote political-risk insurance for the construction and operation of a business-class hotel in Iraq. It also provided $2 billion in financial support to push private investment in the Middle East and North Africa.

“OPIC’s insurance is evolving,” says Nolan. “There’s a lot of interest in insurance for sovereign nonpayment of debt obligations,” particularly with big governments stepping in to resolve the financial crisis. Typically, though, OPIC deals in the hottest of hot-button countries. Its largest financial exposures in 2009 were in Mexico, Jordan, Russia, Nigeria, and Turkey.

MIGA also underwrites political risk. Its stamp on a transaction or asset can actually be more effective than OPIC or private insurance. “Sometimes a local government doesn’t want to default on a MIGA-insured product, because it’s the World Bank,” says Marsh’s Freely. “So some companies use MIGA coverage for loss avoidance as well as risk mitigation.”

Local Flavor

Most companies prefer nonfinancial strategies for mitigating political risk. Executives see maintaining an open dialogue with local governments as well as joint ventures with local enterprises as the most effective tools to lower the risk of adverse government intervention, says MIGA.

As civil unrest spread across the Middle East, politics drew more attention from executives at Cooper Industries, an Ireland-based maker of electrical and circuit-protection products. Dave Barta, Cooper’s U.S.-based CFO, says the company’s operations in Saudi Arabia and Dubai were unscathed. And despite any continuing risks, the company’s exposure doesn’t warrant a huge outlay for insurance. “Insurance is nice, but it doesn’t make your customers feel any better if they can’t get product,” Barta says. “I have to think about the bigger picture.”

Cooper Industries’s philosophy is to hire local workers who can provide on-the-ground intelligence about the political environment and are tied into other information resources in the region. The insight and data are collected at the executive-staff level. Barta says the company has a robust risk-management process overall, and geopolitical risk is a regular part of assessments.

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