The time is now for political risk coverage: P&C execs

Political risk concerns tend to revolve around supply chain issues, since they can disrupt the chain of events leading to a financial transaction.

“Supply chain is [a] key issue to consider, as many of these factors could create a break in the supply chain that could cause a client to have to suspend or delay operations,” says Andrew Cadogan, underwriting manager for management liability and corporate risk at Aviva Canada.

Global supply chains show signs of normalizing following shocks from COVID-19 and the Ukraine war, and so some companies may believe such concerns are easing. But experts warn destabilizing elements can quickly resurface.

“One area we’ve increasingly been talking to clients about is trade disruption, even if they are a domestic company, meaning they don’t have foreign subsidiaries,” says Laura Burns, senior vice president of political risk in the Americas at WTW.

“Almost every company that I speak with has a global supply chain. We’re looking at what’s happening with the Houthi attacks in the Red Sea and how [shipments] now have to go around the Cape of Good Hope in Africa, which is adding to costs.”

Related: How political risk insurers predict potential problems

The Taiwan Strait, South China Sea, Philippine Sea and to a lesser extent the region around Cyprus also are volatile – as are waters and ports along parts of the African coastline, says Will Mulé, executive vice president and Global Risk Solutions practice leader at Hub.

“We’ve had several clients who’ve had their goods seized at the ports [and] we’re looking at what shipping routes [clients] use. Nowadays it’s gotten very complicated how you navigate certain waters,” he adds.

Backup plans 

To determine fixes, brokers and insurers need to articulate their risk management processes, including their backup mechanisms to get products to market. Insurers are asking in-depth questions about whether clients understand their supply lines’ weak points.

“Whereabouts in the chain [are things] likely to break down? Is it a good chain, or [do they have] just one supplier? If it’s the latter, that’s pretty high-risk,” Mulé tells CU. “[We’re asking whether clients will] retest that chain, to see where they can potentially break it.”

Sources also express concerns about clients who float the idea of scaling back coverages, or foregoing protections in the face of growing economic uncertainty.

“Ultimately the purpose of any insurance product is to get a customer back to business and provide claims payments when the unforeseen happens,” says Cadogan.

“Ensuring that the insurance solutions keep regulatory considerations in mind, such as the…need for admitted policies, can be crucial to get the funds needed into the jurisdiction where the claim occurred.”

Which means rolling the dice on political risk coverages could be a mistake.

“We still see quite a few instances of companies not being aware of political risk insurance,” Burns notes. “But we are living through a moment in world history where we’re transitioning into a multipolar world.

“And we are seeing more unrest and more regime change. At this time, we would assert the risk levels are higher, and they should be doubling down on their investment in mitigation.”

Coverage curtailments

Marine insurance carriers are sufficiently concerned about rising levels of confiscation and political violence that they’re starting to curtail geopolitical coverages, Burns observes.

“There are cancellation provisions within marine insurance, where they’re able to cancel those political perils with a certain amount of notice,” she says. “It typically has been seven days. In some instances, we’re now seeing that curtail to 48 hours.”

Related: What recent, and coming, elections mean for Canadian corporate risk

Likewise, sources say businesses shopping for coverages and obtaining quotes should understand policies can be withdrawn or amended at any time prior to binding.

“It’s not like another type of insurance where they can…put it on a shelf and then come back to it in six months or a year and reconsider,” Burns tells CU. “Those…are really a snapshot in time and could change.

“Some have suggested that if there was to be a [second] Trump administration, that support for writing new Ukraine risks goes away. That’s something they would need to think about before November of this year.”

This article is excerpted from one appearing in the October-November 2024 print edition of Canadian Underwriter. Feature image courtesy of iStock.com/primeimages