One of the interesting if unexpected consequences of the global economic crisis is the effect it has had on the English language. The expression ‘contagion risk’, once the preserve of the medical industry, is now frequently used when discussing the risk of interconnected organizations or financial transactions failing and that failure spreading into other sectors or deals.
Globalization and this theory of interconnection is not a new concept, however it does bring about new dangers and companies are under increasing pressure to expand into new territories and engage with new partners; in doing so they are exposed to the risks associated with that.
Little Red Dot
For those of you who don’t follow South East Asian politics, the expression “Little Red Dot”, was originally a disparaging term for Singapore, but it is now a term of pride amongst Singaporeans for the nations success despite its geographical limitations. In order to encourage growth, the Government of Singapore is keen to develop its external economy and encourage Singaporean companies to expand overseas. However there is a justified concern about investing in any jurisdiction with an uncertain legal framework or political volatility.
In a move to tackle this problem and help companies protect themselves from such external risks, the Singapore Government through its trade development body International Enterprise (IE) Singapore has launched an innovative Political Risk Insurance Scheme (PRIS). IE Singapore will cover up to 50% of the premium of a company’s political risk insurance up to the first three years of each policy. To be eligible, amongst other criteria, a company must have its global headquarters anchored in Singapore and have an annual turnover not exceeding S$500 million. The company can then claim up to S$500,000 for political risk cover under the scheme. Early indications show that this has generated significant interest in the local market.
When a company is considering the options of where they want to invest, relations with host governments are never better; however once the investments have been made and equity or debt has been injected, the pendulum of power can swing, and relationships can change significantly. The Arab Spring highlights how quickly circumstances can change.
Political Risks: A Growing Global Concern
Political Risks are characterized as being low probability, but high severity events, and one of the problems with a Political Risk is its unpredictable nature; in spite of this, one trend does prevail and that is that over the last 20 years, Political Risk events have followed political or economic uncertainty.
It seems obvious that companies would wish to protect themselves, however historically there have been three reasons that companies have not purchased political risk insurance: comfort, awareness and price.
Given the infrequency of Political Risk events, it is possible that many risk managers have never had to face a Political Risk, which led in the past to a degree of comfort in the remote likelihood of a loss. However, recent high profile events in Africa, Latin America, Asia and the Middle East have gone a long way to stripping that comfort. Business need to think seriously about political risk protection.
If a company identified these risks and wanted to mitigate them, they were not always aware that Insurance was available. The Political Risk Insurance Scheme has now addressed this and the fact that this is an initiative from the Government, companies are now far more aware of the types of cover available and how they can go about purchasing it.
Finally, even if you identified areas of concern and found a solution, in a climate of expense management and keeping costs down, PRI was still being seen as a ‘luxury product’ as there is no legal obligation to buy. If a company can now claim up to USD$500,000 back from the Government, Political Risk Insurance is more affordable than ever.
The Pool is WideningGiven the increased interest, is the local market able to support this demand? Five years ago in Singapore, there were only three recognized PRI carriers, today there are 16 carriers, providing a capacity pool of USD$860m. The carriers in Singapore are understandably behind this scheme and are keen to help companies expand and grow safely.
To finish with another medical expression, encouraging companies to protect themselves is just what the doctor ordered.
Stuart is an Executive Director of Willis’ Financial Solutions division specializing in political and credit risks. With more than 11 years’ experience in the insurance industry, he is currently based in Singapore covering political and trade credit insurance business for the Asia-Pacific region. Before taking up his role in Singapore, Stuart ran the Banks and Export Credit Agencies in London, handling complex portfolios for major global investment banks, trading, and service companies. As part of the Willis Mining practice, he also advises clients in this area.