As civil unrest escalates and political regimes across North Africa and the Middle East are shaken, how is the reinsurance market feeling the impact?
At the snappily named Insuring Export Credit and Political Risk annual conference held recently in Tower Bridge, London, one bright spark demonstrated that even the industry’s biggest brains had failed to forecast the North African crisis. Pointing to one of the most widely used sovereign risk maps, he showed that Libya and Italy had been considered to face the same likelihood of political violence and state intervention, such as changing the terms of contracts for foreign companies.
By the time of the conference in early March, this assessment had proved utterly flawed. The attempted revolution to overthrow the four-decade-long Gaddafi regime was well under way; president Mubarak’s 30-year rule of Egypt had ended three weeks earlier; while the United Arab Emirates was planning to send troops to quash protests in neighbouring Bahrain.
This is part of a contagion of political unrest that has also drawn in Algeria, Syria, Yemen and, most worryingly for the West given its oil interests, Saudi Arabia.
Insurers in the Gulf have reacted quickly to the prospects of claims on property damage and even contract cancellations. In March, Co-ordination Commission of Gulf Insurance and Reinsurance Companies secretary Fareed Lutfi was reported as saying that “the impact is immediately seen in rising premium levels”.
This will have knock-on effects for reinsurers as their primary cousins adjust their business models and the level of protection they need in this turbulent part of the world. This offers reinsurers a series of business opportunities, as well as a change of risk profile to ensure that an oppressive dictatorship is never again considered as politically stable as a western democracy like Italy.
The long view
So far, the financial impact on reinsurance has not been too great. Munich Re’s client management executive for the Middle East and North Africa region, Andreas Pollmann, says that the company’s losses as a result of the crisis are in the “lower two digit number of millions of euros”. By contrast, the earthquake and tsunami in Japan is expected to cost the group around E1.5bn ($2.16bn).
Munich Re’s exposure is mainly in Libya and Egypt, but even the latter is limited given that it was, until recently, considered a standard regime. Many companies simply didn’t think that they needed cover for political risk or violence in what was viewed as a safe country.
“Insurers have focused particularly on construction and infrastructure [cover],” Pollmann says. “When we look at the fundamentals of doing business in the region, we have to look at the basis of risk assessments and where cover is needed most. There will have to be a revision of where we are for the next 10-20 years.”
Although Pollmann hints that each country will have to be treated separately, given that they should still have “heterogeneous economies”, others are calling for a much more fundamental overhaul of reinsurance cover.
One senior broker source says that many underwriting models will not have factored in political unrest and losses spreading to several countries so quickly. Insurers fear that they might now have to cough up for regional rather than individual state unrest, which would naturally be much more costly.
“This raises questions for reinsurers,” he argues. “They may have to change their models and offer contagion cover on top. Insurers will be asking for another type of product, and reinsurers will have to come up with more capacity.”
The broker points out that many reinsurers do not provide cover for political risk. There is an opportunity for the industry here, but reinsurers will have to find economic ways of providing larger-scale cover for political protest damage and the contractual impacts of regime change.
Charges of corruption
Another broker source points out that damage from the political protests is likely to be minimal. “In Libya, both sides want the oil assets, so they aren’t going to destroy them,” he says. “Plus, a lot of the assets are in the south of the country and the problems are in the north.”
Account manager for political risk services at consultant Control Risks, Dr Joanna Gorska, agrees, adding that property damage and business intervention, such as workers struggling to get to work, has been minimal. Hence, there have been few claims for these problems so far, though she says that “the past couple of months have seen a spike in the volume of requests to assess risks in the region”.
She says these evaluations have found violence to be concentrated in urban areas. As the protests have been anti-government rather than against foreigners, western assets have only suffered accidental damage at worst.
Far more worrying is what happens to contracts once a new government is installed. “There will be instances of investigations into members of former regimes, especially on big contracts with foreign companies,” Dr Gorska explains. “We expect state intervention to increase, but that should mean renegotiation of contracts rather than expropriation or cancellation.”
This is likely to result in overseas firms seeing their shares in major joint ventures decrease, as new governments bow to populist demands for domestic companies to reap most of the rewards. Dr Gorska thinks that many contracts won’t be completely lost, simply because the likes of Yemen and Libya are looking to foreign companies to invest in their infrastructure.
However, not everyone agrees. Founding partner of fraud detection and risk assessment agency K2 Global Consulting Charles Carr warns that “a whole series of disputes come up” when a new government takes office. Often, he says, the new regime claims that contract awards were based on corruption.
This then filters through to insurance and reinsurance. If a company sees its contract invalidated by a regime because of dodgy deals, an insurer could argue that its own cover is therefore void.
Acts of God
Many companies working overseas will have taken out force majeure insurance, which provides cover for contract terminations outside of their control. This includes ‘acts of God’, such as natural disasters, war and revolution.
Companies will obviously look to exercise this protection, provided it is a part of their political risk cover. However, experience shows that this could result in arguments between insurer and contractor, as they dispute whether it was in fact negligence that led to a loss of contract or change of its terms.
“This is the key question [for business] from the uprisings,” says Carr, who has previously witnessed similar disputes in Sierra Leone. “For example, they will have to determine whether or not the change in government was actually through a revolution in order to trigger the insurance policies.”
Insurer Hiscox has looked to minimise the prospects of cover by providing full political risk and violence cover, so terrorism, riots and temporary business shutdowns are all part of the policy. As the cover is rolled together it is more expensive, but getting payment should be painless.
“From our point of view, there has been increased demand since February, particularly from foreign companies working in North Africa,” says Hiscox chief underwriting officer Robert Childs.
He adds that a lot of this demand comes from a perception of risk, so foreign companies hear of the problems in a specific country but still increase cover in relatively safe areas.
“Imagine sitting in your office in Durban: you see the riots over public sector spending cuts in Trafalgar Square and you would think that the UK is falling apart,” he says. “Foreign companies want to protect their foreign assets.”
This perception of risk also means that insurers will look to syndicate their cover among a number of parties so that they will not be hit hard by major political turmoil. Naturally, this will again mean that they turn to reinsurers for safety. This means that the price of cover will go up both for the original party and for the primary insurance market.
The biggest risk
For major corporates, insurers and reinsurers, the big risk is Saudi Arabia. Political risk intelligence consultant Exclusive Analysis forecasts a 45% chance of western expats and oil companies being affected by potential uprisings in the country.
“In Saudi Arabia, if royal succession doesn’t happen cleanly, and oil prices increase, this will have an impact worldwide due to rising energy bills,” explains Exclusive Analysis director of risk analytics Dr Rafael Gomes.
Companies that are energy intensive, such as plastics manufacturers, will find their costs hike. Reinsurers, says Dr Gomes, are particularly at risk of claims here, as they tend to be global players. That means that they back the big insurers providing cover to multinationals, which could be most hurt by an oil price spike.
Dr Gomes adds: “Instability in Saudi would increase contagion risk not just for political violence but also commercial risks. The key message here is not that this is the most likely scenario, but that it requires concerted intelligence analysis.”
That said, the spread of political violence from Tunisia to Bahrain was not the most likely scenario, as the wag at the Tower Bridge conference so clearly pointed out. Reinsurers and the primary market alike will have to show a lot more caution in how they price risk in this region, as claims are likely to increase. The scarier the world becomes, the greater the need for their financial cover. GR
Mark Leftly is deputy business editor at The Independent on Sunday