Capacity in the political risk marketplace has grown steadily since the financial crisis, and at $2.4 billion, market capacity for a single policy of political risk insurance today is nearly twice what it was in 2009, according to Marsh's "Political Risk Market Update." Coupled with strong competition and all-time low pricing, market conditions are favorable toward buyers of political risk.
Increased capacity reflects a shift away from traditional P&C lines toward more profitable specialist classes, Marsh says in its report. Property and directors & officers liability have become crowded with competitors, which contributes toward soft pricing and limited underwriting profits. Specialist lines, however, generally are not affected by swings in the overall insurance market.
Except for 2008 and 2009, combined ratios for political risk have remained below 100 for the last decade — which indicates profitable underwriting results.
Although insurers have seen an increase in both frequency and severity of political risk loss notifications from high-risk countries such as Libya and Ukraine, the industry outlook is positive.
"The global poltical risk landscape continues to be shaped by falling oil prices, geopolitical tensions and regime change…But these trends have not yet translated into catastrophic losses for insurers," says Evan Freely, Marsh's Global Credit & Political Risk Practice leader.
Growth in multinationals, captives
Competition is strong in the political risk market, which contributes toward low pricing. As a result, companies are now purchasing multi-country political risk policies, which can provide coverage for a specific region (such as the Middle East or North Africa). A multi-country policy allows companies to insure countries where coverage is expensive or difficult to insure on a single-country basis, such as in Argentina, Libya, Mali, Myanmar, Pakistan, Russia, Ukraine, Sudan, South Sudan, Syria and Venezuela, Marsh says.
Multi-country policies also signal that insureds are not "attempting to adversely select high-risk countries for coverage," Marsh writes in its report, and carriers can customize coverage to cover a broad range of risks, including political violence, expropriation, currency inconvertibility, non-payment and contract frustration.
The number of captive insurers writing political risk insurance has nearly doubled from 2013 to 2014, due to increased interest from multinational companies who are self-insuring. However, Marsh cautions that political risk losses can be catastrophic. "The cost of paying just one claim for expropriation of assets could leave a captive insolvent unless it is well capitalized," the report says.
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