Latin America has a reputation as a continent dogged by political risk exposures. But the profile has changed since the beginning of September.
In recent years, certain Latin American countries have been noted for their political risk activity. Terrorism and kidnap and ransom were notable exposures for organisations with operations in the region, as guerrilla groups saw opportunities to raise funds or score political points. Back in 1996, the Tupac Amaru Revolutionary Movement of Peru took more than 200 hostages at the Japanese ambassador's residence in Lima, demanding the release of several hundred of their imprisoned comrades. Even then, this was considered a somewhat dated form of terrorism, and a raid by Peruvian commandos considerably weakened the group, leaving the FARC in Columbia as the major guerrilla group in the region.
Nevertheless, in the mid to late 1990s, kidnapping was described as a growth industry in Latin America. In 1995, there were 6,000 or more kidnappings, making it the most dangerous region of the world for this particular crime. In particular, Colombia reached the top of the world table, with at least 4,000 kidnappings in the year, about half of which were carried out by either the FARC or the National Liberation Army. Across the region – indeed, across the world – this threat continues to grow, and a number of insurers such as Chubb, AIG and Hiscox offer kidnap and ransom insurance, as well as advice on how to mitigate risks and deal with situations as they arise.
The events of 11 September have, however, slightly changed the political risk profile of Latin America, moving the focus away from the more ‘traditional' forms of exposures.
According to Sam Wilkin, country risk advisor with Aon Trade Credit, three trends have emerged since the terrorism attacks on the US.
Although the direct impact of the US crisis is not particularly high, it is having repercussions across the continent. For example, it is still unclear from the statements issued by the US government whether Latin American-based terrorism group such as the FARC will find themselves targeted as part of the effort to stamp out terrorists worldwide. In addition, there is what Mr Wilkin describes as a “financial war on terrorist funds” taking place. Panama has found itself under scrutiny as a jurisdiction which may be playing host to assets belonging to known terrorists, though at time of writing no concrete evidence of this had been found.
At the same time, the economic fall-out from the events of 11 September will do little to support Latin America countries. Even before the attack, Argentina was battling with currency and economic problems, which were having a knock-on effect on neighbouring Brazil. If the US slides into an economic downturn, as appears inevitable at the moment, it can only exacerbate the problems of countries which were targets for US investment and expansion plans. In addition, Argentina's pegging of its currency to the US dollar has done it no favours, with the dollar's strengthening over the past couple of years putting substantial pressure on the peso. The worry here is that there could be currency inconvertibility exposures should the peso devalue, a concern which has been lurking in the background, particularly since the country appears to be heading towards defaulting on sovereign payments. “The investment community has been very concerned,” commented Mr Wilkin. Inevitably, this has led to a higher demand for political risk insurance, though some insurers have come off cover, partly because of the inconvertibility risk. “The rates have really climbed dramatically,” he noted.
High levels of investment in Brazil because of its domestic privatisation programme – though it consistently fails to include the IRB in its liberalisation plans – have led to a huge demand for political risk insurance in the country. Even so, there are concerns about the stability of the currency and economy, and over the relationship between federal and state governments.
Investors are also concerned about the political situation in Venezuela. Although there haven't been any particularly disturbing events, the attitude of Hugo Chavez has proved disconcerting. With proposals for land reform, as well as threats to intervene in the management of the banks in the country, both investors and insurers have been concerned that there is increased instability.
As part of its war against terrorism, the US government and its allies are committed to unearthing al-Qaeda cells around the world. So far, elements of the al-Qaeda network have been identified in Peru, Mexico and Brazil, where seven years ago a number of Jews were killed by Arab terrorists. In addition, there are concerns about Argentina, Paraguay, Mexico and the Dominican Republic, predominantly because of their potential links into the financial network of terrorist funds.
And it is unlikely al-Qaeda, the organisation headed by Osama bin Laden, has been isolated in the terrorist desert. “There certainly will be alliances between al-Qaeda and other terrorist organisation through Latin America,” commented Mr Wilkin. This inevitably will shine the spotlight on Latin American groups, and could well step up the war against drugs in Colombia and Peru.
As the geopolitical profile of the world is changing, corporations are reviewing their political risk exposures across the world. Uncertainty over the world's political risk profile is about the only certainty in present times, and this political instability could well be underpinned by global recession. Such huge changes are understandably making underwriters very cautious, while at the same time their clients are wanting to make sure their exposures of people and assets overseas are covered. With property insurers now systematically excluding terrorism covers, whereas before it would have been a standard coverage within a policy, businesses are turning increasingly to the speciality market to provide the insurance. Whether the traditional market is so inclined is another matter.
Nevertheless, currently governments are looking to the private insurance markets to provide the cover, before stepping into the breach themselves. Already, there are a number of government-backed agencies around the world such as OPIC and MIGA which provide certain levels of political risk coverage to their nationals operating in overseas markets.
In response to the increased riskiness across the world, organisations appear to be taking a close look at their crisis management programmes. Political risk insurers and brokers have seen a marked increase in requests for advice from businesses wanting to check the strength of their programmes and update them where necessary. Employees in risk-exposed countries now are often receiving up-to-the-minute advice in this world of heightened awareness. In particular, those organisations that are recognised as US icons, or businesses emanating from countries with close connections to the US, are finding themselves taking special precautions across the whole of their operations. The stark reality is that change is the only constant, and vigilance is the watchword.