Strong capacity drives buyer’s market for political risk insurance: Marsh

Abundant capacity and strong competition have contributed to a generally favourable marketplace for buyers of political risk insurance coverage globally as the second half of 2015 approaches, according to a Marsh briefing released on Wednesday.

“Despite growing concerns about global political and credit risks and a recent increase in loss notifications – which will likely translate into losses for insurers later this year – insurers generally view political risk as an attractive line of business,” Marsh said in the Political Risk Market Update report. “And with pricing at an all-time low, multinational companies are increasingly purchasing political risk insurance to protect shareholder value, support growth in foreign markets, and help secure financing from lenders.”

The report notes that capacity in the political risk marketplace has steadily increased over the last decade, particularly since the financial crisis. Globally, market capacity now exceeds US$2 billion for a single policy, nearly double the available capacity just six years ago.

This increased capacity reflects a shift away from traditional property and casualty lines toward more profitable specialist classes of insurance. “Insurers are finding those revenues in political risk insurance and other specialty lines that generally do not correlate with swings in the overall commercial insurance market,” the briefing said. “Combined ratios for political risk have generally remained below 100 for the last decade (with the exception of 2008 and 2009, at the height of the global financial crisis), indicating profitable underwriting results.” [click image below to enlarge]

Evan Freely, Marsh’s global credit and political risk practice leader, said in the report that the global political risk landscape continues to be shaped by falling oil prices, geopolitical tensions and regime change. “But these trends have not yet translated into catastrophic losses for insurers,” Freely said. “Combined with the lack of profitability in more traditional insurance markets, this has led many insurers to essentially ‘double down’ on their investments in political risk.”

Of course, political risks can often emerge in unexpected places. “For this reason, most companies are now purchasing multi-country political risk insurance policies instead of single-country policies,” Freely said. Multi-country policies can provide coverage for a specific region (such as the Middle East and North Africa) or a longer list of countries.

The briefing recommended that organizations that have not historically purchased political risk insurance to consider doing so in the current favourable market. And for companies that have already purchased coverage, “now may be a good time to consider expanding a political risk insurance program.”