You might be forgiven for thinking that the world is a particularly unstable and risky place at the moment, especially in terms of political risk. But surprisingly, political risk insurance is cheap, freely available and can include countries where tensions are high. Indeed, according to a Political Risk Market Update from Marsh’s Credit & Political Risk Group, abundant capacity and strong competition have contributed to a generally favourable marketplace for buyers of political risk insurance, according to a commercial risk Europe report.
Ukraine has witnessed increased political violence
“Despite growing concerns about global political and credit risks and a recent increase in loss notifications-which will likely translate into some losses for insurers later this year-insurers generally view political risk as an attractive line of business in which to compete. 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,” said Marsh.
Evan Freely, Marsh’s Global Credit & Political Risk Practice leader, said: “The global political risk landscape continues to be shaped by falling oil prices, geopolitical tensions and regime change, whether as a result of constitutional elections or otherwise. But these trends have not yet translated into catastrophic losses for insurers. 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.”
Capacity in the political risk marketplace has steadily increased over the last decade, particularly since the financial crisis. Globally, market capacity now exceeds $2 billion for a single policy, nearly double the available capacity just six years ago, said Marsh.
The broker explained that this increased capacity reflects a shift away from traditional property and casualty lines toward more profitable specialist classes of insurance. Many traditional insurance lines, such as property and directors and officers (D&O) liability, have become crowded with competitors, contributing to prolonged soft pricing and limited underwriting profits, and in addition, insurers have also not been able to generate much investment income because of low interest rates, which had led them to expand their product offerings to find new sources of revenue, said Marsh.
As a result, 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. 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.
