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Political risk insurance markets are cautiously watching the unfolding instability across the Middle East and North Africa region, writes Kevin Godier.
After almost a decade of relative stability in North Africa, the perceptions of the Maghreb region by the PRI community have been dramatically transformed by the populist ousting of Tunisia’s long-time dictatorial ruler Zine al-Abidine Ben Ali and an end to nearly 30 years of authoritarian rule in Egypt under President Hosni Mubarak.

Anti-government protests inspired by the toppling of the rulers in Tunisia and Egypt were gaining pace around the wider region despite political and economic concessions by nervous governments. As GTR went to press, Libya became the next country to fall. Violent clashes between protesters and Gaddafi supporters continue and have already left hundreds dead.

“Private market PRI insurers are becoming concerned about the contagion effect,” Keith Thomas, director, political, project and credit risks at Gallagher London told GTR. “How does an underwriter evaluate a transition government, especially when you don’t know who’s who?” he queried.

With regional unrest rising, most notably in Bahrain, Libya and Yemen, the general sentiment among PRI underwriters was understandably a ‘wait and see’ stance, on the basis that evolving events had yet to fully crystallise. So far, claims on Egyptian obligors have been notified, and at least one of these is substantial, reported insurers, but PRI exposure to Tunisia is negligible.

Among the broking community, Beverley Marsden, director of Aon Political Risks remarks: “We are all watching what happens to the Egyptian government.

“Whatever political system emerges will likely have medium-term implications on political risk. Right now the market can only look at their exposures and monitor the situation as it unfolds.”

Another London-based broker said that premium rates have risen steeply for Egypt and Tunisia, and that claims coming in from the Egyptian market have included “burned-out supermarkets”. In late 2010, contract frustration (CF) rates stood at between 0.5–0.6% for Tunisia and at 0.9% for Egypt. “They have since risen by well over 100% for both markets,” Marsden stressed.

One London-based political risk insurer, Beazley, is predicting that the civil unrest will spread across the Middle East and North Africa (Mena) area. “The losses resulting from the troubles in Egypt will be felt across London’s political risk market and will be a prominent factor in driving a comprehensive reappraisal in the sector,” said Adrian Lewers, head of political risks and contingency.

Lewers contended that “the current protests mark the start of a new era of unrest”. In a recent political risk briefing, Beazley identified six countries that it said are “most vulnerable to destabilising civil unrest in the Mena region and are at risk of regime change”, citing Libya, Sudan, Algeria, Iran, Saudi Arabia and Syria as the highest risks in this respect.

The implications of this scenario are “profound for business”, said Lewers. “As we are seeing in Egypt, political unrest can lead to investment losses and business interruption due to general strikes and curfews; postponement of government and private projects; loss of, or damage to assets because of looting and sabotage; as well as the potential for insolvency risks, capital flight, banking sector restrictions, and capital controls.”

Regime change also frequently entails public contract reviews. “The hazard that a new regime might not recognise the existing commitments and agreements entered into by the predecessors is always a fear among underwriters,” Thomas at Gallagher London highlighted.

Tunisian fallout

Having long been the Maghreb’s star economic performer, Tunisia’s eruption into huge public demonstrations, and the eventual departure of President Ben Ali came as a shock to experienced North Africa analysts.

With the jury still out on whether interim Prime Minister Mohammed Ghannouchi’s reforms will win popular support, one of the key cover criterion at present for PRI underwriters when scrutinising potential obligors is “establishing any level of involvement by the former president and his family”, said Thomas Holmes, at the London office of brokerage Miller Insurance Services. “All underwriters will have looked hard at their country aggregates,” he added.

According to another broker, Tunisian PRI rates for non-payment stood at 2.5% in early February. “There is not a lot of business out there and the majority concerns the state-owned oil refinery Société Tunisienne des Industries de Raffinage,” he said.

“We are now waiting and watching before assuming any new risks,” said Jerome Swinscoe, senior underwriter at the HCC International Insurance Company. “Depending on how quickly a relative stability returns to Tunisia, there could be a more or less negative impact on contract frustration and credit risks in the country.”

The main Tunisian issue for underwriters was initially the political violence seen in the first few days of the ‘Jasmine Revolution’, when a variety of different interests were attacked, including the local branches of French retail giants Carrefour and Casino. However “political violence no longer seems to be the most pressing issue, even though there is still a risk,” Swinscoe said.

Egyptian scenario

Egypt has dominated the demand in recent years for PRI cover in North Africa. “As a category ‘D’ country, where many underwriters have already reached their maximum capacity, any default by a name such as Egyptian General Petroleum Corporation (EGPC) would be very costly for the market,” said Gallagher’s Thomas. “As the uncertainty pushes oil prices above US$100 per barrel, underwriters are concerned that emerging markets that import refined products and already subsidise oil and food prices locally, will be forced to default,” he added.

“As long as protests continue in Egypt, insecurity and social unrest will prevent a return to normal social and economic life,” added Daan Rowies, an analyst at Belgium’s ONDD.

Banks are expected to remain closed as long as the security situation remains fragile, leading to delays in letter of credit (LC) payments. Moreover any longer period of instability “will affect Egypt’s tourism sector, which is one of the country’s most important sources of foreign exchange revenue”, Rowies underlined.

Another underwriter admitted that his insurance company holds a US$68mn single risk exposure in Egypt, involving supplies to Egypt’s military forces, paid via an LC, but stressed that this was not providing any concerns. “The local bank which issued the LC has no links to Mubarak’s family,” he said.

PRI specialists were unanimous that the biggest Egyptian concern among existing and potential clients is the state-owned EGPC, which signed US$3bn of pre-export loans last year, according to Bloomberg. “Banks that participated in pre-export financing for EGPC in 2010 are now looking for insurance cover – but of course the price has increased sharply,” the underwriter observed, adding that EGPC “has cashflow problems, which have caused some payment delays”.

According to another broker in the London market, these delays have not resulted in claims because the incidents were judged to be ‘relationship issues’ that would not affect EGPC’s ability to eventually pay. However cover against EGPC would now be almost impossible to secure, he predicted. “Most markets were full on EGPC before the current crisis, so I can’t see anyone offering non-payment cover in the current climate – at least until things have calmed down, the banking system returns to normal and a new government is in place,” he said.

Contagion concerns

The fear that the sentiment underpinning the Egyptian and Tunisian uprising will spread elsewhere across the Maghreb has seen the PRI market keeping an eye on Algeria, which experienced riots over food prices in early January, and where – amid subsequent pro-democracy rallies – the government has lifted a 19-year state of emergency.

Underwriters said that Algerian exposures are relatively high, and that problems in recent years with delayed payments had pushed up PRI pricing. One private market insurer said that payments for imports from state companies “were always very regular until quite recently, when a series of payment blips has been a key driver behind a slow but steady rise in the PRI pricing asked for Algeria”.

The rate charged by the single risk insurance market for covering the risk of non-honouring of a letter of credit issued by a top Algerian bank has climbed back from rates that sometimes dipped below 50 basis points several years ago, to between 0.75% and 1% per year, according to one underwriter. He added that the “the biggest political risk is from terrorist group attacks, which are slowly getting more frequent”.

Gallagher’s Thomas has observed that Bahrain “has produced a sudden flurry of enquiries for political violence cover, amid mounting speculation that the season-opening Formula 1 Grand Prix may have to be cancelled in the wake of increasing unrest”. As GTR goes to press, the Crown Prince of Bahrain called off the race due to the civil unrest that has gripped the country.

Beazley’s Lewers explains that he expects that over the next few months the insurance market will “engage in a comprehensive reappraisal of political risk, which will see risk appetite curtailed and market capacity cut”. Such a situation “would mean an increase in premiums for political risk and political violence cover, and a shortening of tenors”, he cautioned.
“The civil unrest across the Middle East and North Africa region serves as a stark reminder that many emerging markets remain inherently risky places in which to operate,” he concluded. GTR