Growing Economic Instability Changing Risk Picture

The economic crisis is creating scarcity in available credit and political risk coverage, executives from Aon insurance brokerage firm said.

Their assessment that carriers are tightening underwriting in the face of increased political and economic instability came during the presentation of the Chicago-based firm's “2009 Political Risk Map” that evaluates the risk level of nations throughout the world.

The company said economic conditions are putting more nations in the unstable category.

“There has been a hardening on the underwriting side for credit insurance, which is perhaps a natural consequence of the [credit] crunch and tightening economic situation,” observed Roger Schwartz, senior vice president for Aon Trade Credit.

He said capacity remains, but because of tighter underwriting guidelines, ability to obtain coverage has become “more difficult.”

On the political risk side, Miles Johnstone, director of Aon's Political Risk team, said capacity remains for that coverage except where there is high demand. For those risks, he said capacity has almost been exhausted and the capacity crunch has existed for a while.

Underwriters are not writing coverage for “very high risk” nations, but otherwise have not pulled out of underwriting, the executives noted.

The Risk Map, in its 16th year, featured several new points of evaluation.

Among those new points of evaluation, seven countries–Afghanistan, Congo DRC, Iran, Iraq, North Korea, Somalia and Zimbabwe–were singled out as “very high risk” because the stability and security has worsened, and insurance coverage for clients doing business there is virtually impossible to get.

Within the past three to six months there has been an increased interest in obtaining credit and political risk coverage, said Mr. Schwartz. He attributed this primarily to the ongoing economic instability throughout the world.

On the pricing front, Mr. Schwartz said there have not been across-the-board increases in coverage for these products. He said price drivers are based on location, project and exposure.

The credit crisis has expanded instability in nations that only a year ago were considered politically stable. An example they pointed to was Iceland, where the nation's economic collapse has led to protests and the dissolution of the current government. Other nations are seeing a rising tide of protests and riots in response to the current crisis.

While the ranking of 13 countries was upgraded to a lower risk level, 18 were downgraded to higher risk levels–among them Iceland, Greece and Hungary.