How political risk insurers predict potential problems

Insurance coverages for political risk capture a range of possible outcomes – from goods confiscation and problems with currency convertibility, to political violence, sovereign payment default, and contract frustration.

“You’ve got the coverage part,” Will Mulé, executive vice president and Global Risk Solutions practice leader at Hub says. “And then you’ve got the loss prevention, which is the risk management side and being able to advise our clients; being able to provide good contract language; [and] provide solutions to potentially push back on anything that’s going to be too imposing on them.”

Contract reviews are also key because insurers want to see language remaining consistent year-after-year.

“If we start to see a shift in some of the language, then…we’re able to pick that up [and] provide solutions on how to push back on particular language that’s being inserted,” he adds. “We…try and be as proactive as we possibly can. Insurance is the last line of defense…you use [it] because everything else has failed.”

Table stakes for risk

Recently-tightened risk management reviews by underwriters for clients seeking business interruption coverage will likely tighten further, Mulé predicts.

“Insurers and underwriters are changing what they look at in terms of the robustness of risk management on the part of the company before they discuss or write coverage,” he tells CU. “The key is to…make sure the business is not interrupted for too long.”

For example, cyber liability policies for multinational businesses require multi-factor authentication procedures as a baseline. Without it, he says, coverage simply isn’t forthcoming. “The better the risk management policies or procedures, the easier it is to define capacity and premiums at an affordable level.”

Other key coverages include expropriation (the seizing of assets such as factories or mines), confiscation or nationalization of corporate assets, or tax avoidance and liability claims from foreign tax authorities, says Andrew Cadogan, underwriting manager for management liability and corporate risk at Aviva Canada.

There’s also political violence, adds Mulé, “we are seeing rising nationalism and populism and protectionism, [which makes] covering things like embargo or the inability to export increasingly important.”

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

Financial freezes

Potential for increased economic volatility also makes non-transfer insurance, which covers the inability of a Canadian investor to repatriate funds, more important, says Laura Burns, senior vice president of political risk in the Americas at WTW.

“Let’s say [someone] wants to repatriate profits, dividends, intercompany debt service payments [or] trade payables and a foreign government were to close the foreign exchange window and prohibit the ability to convert or transfer and bring the money home,” she tells CU.

If a country is facing the risk of sovereign default, the risk of currency and convertibility non-transfer increases – because the country will need to keep its currency on hand to manage a potential economic crisis.

“I would suggest Canadian exporters and investors look at their coverage and make sure that they have it,” she says. “The risk is a bit heightened [due to high rates of] public spending on COVID, and a [lingering] cost of living crisis…with food and energy prices being high,” she says.

Plus, if a Canadian exporter inks a long-term contract with a foreign government or private entity, the Canadian company needs to obtain coverage against a possibility that political unrest, including regime change, might spur currency convertibility problems, export controls or embargos.

Any of those outcomes will affect those contracts, notes Burns.

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