Political Risks Increase, But Not Rates, Says Alliant

The political perils U.S. companies face internationally have increased by 5 percent, an insurance brokerage that rates such risk announced.

But despite rising concerns, the cost of insurance coverage for such exposure continues to decline, according to an executive of Alliant, which released its latest Political Risk Index.

"What is most surprising is that while there is an increase in risk, the consensus view is that the market has not turned hard but continues to remain soft," said John Minor, head of emerging markets for Newport Beach, Calif.-based Alliant.

According to his company, the Political Risk Index rose from 72.5 in March 2006 to 76.1 in February 2007.

The firm said the increase was driven by three major worldwide developments: rising risk of expropriation in Latin America, regulatory uncertainty in Central Asia, and worsening credit conditions in Eastern Europe and Southeast Asia.

Mr. Minor said in an interview that the index reflects carrier loss experience and can be viewed as a predictor of what will happen over the next 12-to-24 months.

Interestingly enough, he noted, despite the mounting concerns, insurance prices for political risk and credit loss coverage have not been affected.

"What we see on the horizon is the collision between soft rates and losses rising," he added.

He said eventually it will become difficult for high risks to obtain adequate coverage, such as telecom and mining businesses.

"This poses a challenge ahead for providers and buyers," said Mr. Minor.

However, he said, an overall hardening of this market will not be seen possibly for years to come until excess capacity dries up. That capacity could dry up quickly with the onset of a significant crisis, he said, adding that the current market resembles the pre-9/11 marketplace for these risks.

Looking at some of the risks, Mr. Minor noted that South America has seen a return "to old-fashioned 1970s style expropriation targeting U.S. assets." A major concern is that these actions could ignite similar actions elsewhere.

Michel L?onard, chief economist and head of consulting for Alliant Emerging Markets, said in a statement that growing overseas investment has given Central Asian governments more bargaining power, and it is expected they will exert that power at some point, but investors show a surprising absence of concern over the political risk.

Another area of concern Mr. L?onard pointed to is rising financial-crisis risk in Eastern Europe and Southeast Asia. Current data indicates that companies engaged in trade finance in Hungary, Bulgaria and Georgia face increased default risk.

The report also warns that stock investors in Iran, Thailand, Venezuela, South Africa and Azerbaijan, based on ratings changes over the last six-to-12 months, could face potential losses of 10 percent to 20 percent.