Financing large infrastructure projects has caused a surge in demand for political risk insurance (PRI) in recent years and prices have generally softened as a result.
Vice-president and COO of the Multilateral Investment Guarantee Agency (Miga), Michel Wormser, tells GTR that the volume of guarantees Miga has issued over the last five years has doubled, and the agency is planning to increase capacity by at least 50% in the next four years.
“More and more investors choose to protect themselves against political risk as they expand their activities in markets which are less familiar to them,” Wormser tells GTR. “Our expansion reflects the strong interest by middle-income countries for credit enhancement products that help them finance their large infrastructure needs.”
A similar upsurge in demand has been witnessed by the private PRI market. Senior vice-president of political risks at AIG, Ray Antes, also sees a correlation between the increasing demand for PRI and the number of larger infrastructure projects in the world’s developing countries.
“Large projects tend to require a broad array of subcontractors and equipment suppliers,” he says. “Often the skills required have to be brought in from outside, so you get more companies trading abroad who are looking to manage the risks they face.”
Political risks and contingencies underwriter at Beazley, Roderick Barnett, thinks that infrastructure growth in “frontier” markets like those in Sub-Saharan Africa helps to explain why demand for global PRI is rising so sharply: the pace of economic growth in those markets is combining with a natural return of the risk appetite of investors.
“A lot of our business has been written in Africa in the last two or three years – probably 20 to 30% of the total exposure we run,” he tells GTR.
“Investors focussed on large infrastructure projects are entering the market. With those investments come concession agreements signed with governments and with those come the potential for breaching those agreements down the line. Investors are increasingly cognisant of those risks, and so the particular growth in frontier market infrastructure investment provides an added reason for seeing such growth in demand for PRI.”
Beazley’s figures demonstrate the rising use of the Lloyd’s PRI market in London. A 30% increase in PRI enquiries was seen between 2012 and 2013. PRI demand has increased 18% in 2014 year-to-date versus 2013.
Antes also recognises the influence of investor uncertainty in the wake of the 2008 financial crisis. “The crisis exposed risks in countries that were once regarded as secure,” he says.
“The so-called ‘Pigs’ (Portugal, Ireland, Greece and Spain) and the Arab Spring countries provide examples of markets once thought of as being relatively stable but where socio-political upheaval has increased the operational risks for trading companies. More recently, the crisis in Ukraine and Russia continues to make investors nervous.”
PRI policy pricing has softened as a result of the uptick as the insurance market has increased its capacity to cater for this surge in demand. “Larger risk businesses like PRI have recently seen a huge amount of capacity come in,” says Barnett.
“Demand for PRI products has probably helped steady the market, and although it’s generally a softer pricing environment, there are countries like Iraq and regions like North Africa where premiums remain very high.”