With the current global trading environment more politically volatile than ever, insurance that covers political barriers is crucial for companies looking to mitigate the risks of engaging in cross-border trade that may be disrupted due to government action or political unrest. New research from the Berne Union reveals that there has been a 50% increase in new political risk insurance (PRI) cover issued by its members this year, and that politics is playing an increasing role in medium and long-term insurance claims. Maddy White reports.


Whether we take Brexit, the US-China trade war, Venezuela or Ukraine as an example, trade and politics have become increasingly intertwined. This has had a notable impact on insurance data: over the first half of 2019, insurers across the globe have reported a 21% increase in claims paid and a decline in volume of new commitments, citing uncertainty fuelled by increasingly negative trade policy and deteriorating macro-economic conditions, according to the Berne Union. Collectively, members of the association provide payment risk protection for approximately 13% of world annual cross-border trade in goods and services and, since 2008, have paid out more than US$48bn in claims.

New PRI cover to the tune of US$27bn was issued by Berne Union members in the first half of 2019, a 50% increase compared to the same period last year.

It’s no great surprise given the stats: over half (55%) of global companies with revenues exceeding US$1bn experience at least one political risk loss exceeding US$100mn in value, reports brokerage firm Willis Towers Watson in its most recent annual PRI statistics. “It is clear from our findings that political risk has increased significantly, now becoming a reoccurring and material cost of doing business. If these levels remain elevated, the need to acknowledge these losses and disclose mitigation strategies will be crucial,” says Paul Davidson, chairman and CEO of Willis Towers Watson financial solutions.


Political risks spread wider

The Berne Union’s latest research shows that members paid just over US$3bn in claims for the first half of 2019 in total, an increase of a fifth on the same period last year: of this, US$1.5bn for medium and long-term (MLT) business, US$1.3bn for short-term (ST) and the rest for PRI.

While only a smaller amount of claims made were for PRI business specifically, most export credit insurance (MLT and ST) covers both commercial and political risks, defined as political violence, expropriation, breach of contract, arbitration award default, wrongful calling of bonds and currency inconvertibility. The Berne Union says that when it comes to measuring political risks, the situation is “sticky”, as the definition is narrow, and broader political issues play a role in commercial risks, which generate the majority of claims.

For example, if a government changes its policy on taxation and this impacts trade in a certain industry, this could be considered a political risk, despite it not matching the classic definitions. Claims recorded as commercial indicate that the claim came as the result of a buyer defaulting on payment. But this doesn’t explain why the buyer may have been unable to pay in the first place, meaning political risk could have been the catalyst.

Overall, the Berne Union says 20% of claims paid in 2019 H1 were due to political risks. This is up from 14% in the same period in 2018. But this figure could be much higher because of the narrow definition of the term.

In MLT business, claims recorded as political tripled from just 10% in 2016 to 31% at the end of June. “What we’ve seen in our members’ data is that political claims have made a comeback,” Vinco David, the Berne Union’s secretary general tells GTR in a conversation at the association’s London office. One reason for the increased number of political claims, he says, is crisis-embroiled countries like Venezuela and Ukraine, where insurers have seen a spike in claims for business that was underwritten years ago.



David says there has been a “levelling-off” of global trade which has been matched by the short-term trade credit and investment insurance business of Berne Union members. Insurers of short-term trade credit reported US$1.7tn aggregate credit limits issued at the end of June 2019 – no real change since the end of 2018, mirroring a lack of growth in underlying trade volumes. He says there are various reasons for this stagnation.

The first is trade conflicts. The tension between China and the US has had an impact on global trade flows, benefitting some markets such as Vietnam and Thailand, as supply chains are relocated away from China. For example, in Standard Chartered’s Trade20 Index, which measures the top 20 markets for potential trade growth, Vietnam came in an impressive sixth. But, according to David, these conflicts are rarely good for economic growth and trade in the long run. Political violence in North Africa and the Middle East is impacting trade, specifically oil. The Value at Political Risk (Vapor) report for Q3, produced by global advisory firm Oxford Analytica reveals that the oil and gas industry is the most politically exposed sector globally due to spiking political violence in the Strait of Hormuz.

He explains that another reason could be related to the cyclical nature of the global economy: “We may have also reached a turning point in the economic cycle. We have had some good years, but already last year we have seen the start of the turn of the cycle. Some countries may have just escaped recession, but even high-growth countries now show a lower growth rate, such as China and some of the other Asian tigers. It’s not bad now, but the high-growth figures that we were used to over the past few years are no longer there.”


Hotspots for claims

The increase in claims paid overall has been powered by several hotspots facing specific economic and political challenges.

Argentina: In 2018, Argentina received the biggest loan package ever from the International Monetary Fund (IMF), aimed at boosting the country’s ailing finances: US$57.1bn to be disbursed over three years. The IMF currently forecasts that Argentina’s economy will contract by 3.1% and that 2019 will close with inflation at 54.4%. GDP is projected to contract by 1.3% in 2020. The poor state of the economy has likely led to more insolvencies in Argentina, resulting in extra claims.

UK: The UK’s inability to agree a Brexit deal has left business owners in limbo for more than three years. If no deal is passed by the British parliament, the UK will leave the EU by default on January 31, 2020. This prolonged uncertainty has led to Europe seeing one of the largest percentage increases in claims payments for ST business.

Commodity-reliant economies: Resource-dependent regions are rocked when the price of commodities such as oil or precious metals, like copper, plunge. For example, between mid-2014 and early 2016, the global economy faced one of the largest oil price declines in modern history; the 70% price dip during that period was one of the biggest drops since World War II. “At the moment, commodity prices have recovered, but if there are shocks in oil or metal prices, the regions which rely on such resources are very vulnerable. When prices fluctuate the insurance market is immediately affected,” explains David.

Ukraine: Ukraine is in a bloody conflict with Russia over Crimea and parts in the country’s east. The United Nations (UN) estimates that conflict in the east of Ukraine has killed 13,000 people and displaced 1.5 million since problems started in 2014. “Members have paid more claims because of mounting Ukrainian violence and I don’t see that recovering or changing quickly,” says David.

Last year Ukraine launched its own ECA, PJSC Export Credit Agency, aiming to support Ukrainian exporters. While the creation of a new ECA won’t directly reduce the risks for foreign companies exporting into Ukraine, the creation of stronger Ukrainian firms, via better export support from its ECA, can only be a positive contributor to promoting trade both into and out of the country.