Political Risk

Enabling Expansion

Political risk and trade credit insurance offer protection against uncertainty and pave the way for global growth.
By: | April 28, 2016 • 6 min read

Despite the rising tide of political and economic turmoil in the world, the cost of buying political risk coverage and trade credit insurance is declining even as demand is sharply increasing.

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“The pricing has become much more competitive,” said New York-based Lila Rymer, head of U.S. underwriting for political risks and trade credit at Beazley. “A lot of new entrants and more capacity in the market has driven this competition.

“So it’s a very good time for clients to consider buying political risk and trade credit insurance because the terms are quite favorable,” Rymer said.

New York-based Stuart Barrowcliff, senior underwriter, political risk for XL Catlin, added that capacity is growing because it is a way for insurers to diversify and expand offerings beyond P&C “where there’s obviously lots and lots and lots of capacity and tremendous pressure on premium.”

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Lila Rymer, head of U.S. underwriting for political risks and trade credit, Beazley

A report by Marsh noted that political risk insurance capacity has steadily increased over the past decade, particularly since the financial crisis. In some cases, market capacity for a single policy now exceeds $2 billion, nearly double the available capacity just six years ago, the report said.

Likewise, the increase in trade credit insurance in that period has grown considerably, driven by — among other things — E&S insurers entering the market, as well as banks, other financial institutions and Lloyd’s syndicates making major inroads in this market.

“You also see some of the private equity companies, hedge funds and others who are looking at putting together funding vehicles to invest in trade finance assets and they can come to the trade credit insurance markets to sit behind them,” said Jeff Abrahamson, Baltimore-based global head of supplier trade credit for XL Catlin.

Comprehensive Coverage

In years past, companies and financial institutions might typically buy stand-alone political risk coverage, said Owings, Md.-based James Daly, president and CEO of Euler Hermes Americas.

James Daly, president and CEO, Euler Hermes Americas

James Daly, president and CEO, Euler Hermes Americas

“But the trend today is to purchase comprehensive coverage, which includes protection against both trade credit losses and political risks,” Daly said.

“Traditional trade credit insurance adds another layer of comfort, protecting against bad debt losses when a customer simply does not pay its bills.”

Political risk insurance protects foreign assets held by multinational corporations, financial institutions, investors and project contractors against the risks of confiscation, expropriation, contract frustration and nationalization, Daly said.

“In addition to providing protection for trade transactions, it may also cover production facilities, equipment, offices, refineries and other fixed assets and equity investments,” Daly said.

Political risk circumstances usually include war, terrorism, riots and actions by local governments, such as changes in export or import regulations that affect the outcome of a transaction.

“Traditional trade credit insurance adds another layer of comfort, protecting against bad debt losses when a customer simply does not pay its bills.” — James Daly, president and CEO, Euler Hermes Americas

Fredrik Murer, New York-based head of Americas, political and credit, for Chubb, noted that political risk and trade credit insurance offer balance sheet protection in an uncertain world.

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“Tremendous volatility entered world markets when the commodity super cycle burst,” said Murer.

“The rapid drop in oil prices created upheaval in country and corporate balance sheets alike, creating both political and credit risks in the process.

“Foreign exchange fluctuations add to the stress on U.S. dollar payment obligations. What started as an economic risk may quickly become a political or credit risk as countries act to protect their local interests.”

Corporations and banks are the major buyers of trade credit insurance.

“Banks might buy an annual trade credit policy that we have the option of renewing,” said Beazley’s Rymer.

“When a company is selling goods to a buyer, for example a Brazilian buyer, a bank might purchase the receivables from the supplier. If the supplier is due to get paid in 60 days, the supplier might say, ‘I want to be paid tomorrow.’

“By selling the receivables to a bank, the bank can cash out the supplier up-front and then the buyer owes the money to the bank.”

Rymer added that when banks invest in bigger projects in emerging markets, say a mine or an oil field, they are likely to seek political risk coverage or more comprehensive credit insurance on the investment they’re making.

XL Catlin’s Abrahamson said that other clients are non-bank financial institutions that are providing working capital for corporate clients.

“Banks are using trade credit insurance as a real driver on the trade risk receivables side,” he said.

“A lot of banks will finance receivables for their customers and procure insurance on that financing. This can help them more efficiently utilize their capital.”

Growth Strategy

For corporations, maintaining trade credit insurance and often political risk coverage along with it has become an increasingly important way to expand their business.

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“It’s not just about mitigating risk, but very often trade credit insurance helps companies grow their business, so they can increase their lines of credit and expand the business they are already doing,” said Rymer.

“It might help a company access financing through their lending bank. By having trade credit insurance on their buyers they’ll be able to get bigger lines of credit from their lending partners.”

Or if a company is internally very comfortable with a certain limit to a buyer where they see an opportunity to grow, they can credit insure those receivables, which may enable them to extend a bigger line of credit to that buyer and grow overall sales, she said.

Chubb’s Murer noted that political risk coverage and trade credit insurance provide a company with more certainty.

“With this insurance, if the unexpected happens you know there’s a level of protection against an outcome that can be catastrophic to your continued operations,” he said.

Gregg Badger, COO, Ronald A. Chisholm Limited

Gregg Badger, COO, Ronald A. Chisholm Limited

“A company can invest and grow its sales base with more certainty and lenders can benefit as they support the continued expansion of their corporate customers.”

Added Gregg Badger, COO for international food merchant Ronald A. Chisholm Limited, “If we did not have trade credit insurance and political risk coverage we would be hard-pressed to do any borrowing against our non-North American receivables.”

Badger said that 60 percent to 80 percent of Chisholm’s business is outside of North America and the company needs that working capital to keep it operating and growing. Chisholm actively does business with hundreds of companies in 50 to 60 countries, he said.

When the company’s salespeople are out looking for new customers and trying to open up new markets, one of the first steps they take is to see whether the customer they’re calling on is creditworthy, i.e., insurable or whether it’s on open credit or on secured terms, Badger said.

Managing the risk of accounts receivable, customers and processes allows the company to assure its banking syndicate that the receivables are insured, he said.

Steve Yahn was a freelance writer based in New York. He had more than 40 years of financial reporting and editing experience. Comments can be directed to [email protected]

More from Risk & Insurance

More from Risk & Insurance

Absence Management

Establishing Balance With Volunteers

It’s good business to allow job-leave for volunteer emergency responders, whether or not state laws apply.
By: | January 10, 2018 • 7 min read

If 2017 had a moniker, it might be “the year of the natural disasters,” thanks to a phenomenal array of catastrophic or severe events— hurricanes, tornadoes, wildfires, ice storms and floods.

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Combined with smaller-scale fires and other emergencies, these incidents tax the resources of local and state emergency services, often prompting the need to call volunteer emergency responders into action.

But as lean as most organizations are already running, volunteer activities can sometimes cause friction between employees and employers. Handling conflicts the wrong way can potentially lead to legal headaches, harm employee morale and batter a company’s reputation.

State by State Variations

Most employers are aware of the various federal and state leave laws protecting their employees, including family and medical leave, pregnancy leave and military leave. But leave laws that protect the livelihoods of volunteer emergency responders are more likely to fly under the radar of some HR managers and risk managers.

Such laws don’t exist in every state, but more than 20 states do have some type of law in place to protect volunteers including emergency responders, firefighters, disaster workers, medical responders, ambulance drivers or peace officers.

Marti Cardi, vice president of Product Compliance for Matrix Absence Management

The laws vary broadly. Nearly all specify that such leave be unpaid, and that employees disclose their volunteer status to employers and provide documentation for each leave. But there is a spectrum of variations in terms of what may trigger an eligible leave. Some, for instance, apply for any emergency that prompts a call from the volunteer’s affiliated responder group. Others may require a government declaration of emergency for the law to be triggered.

While many of the laws do not explicitly require employers to let employees leave work when called to an emergency during a shift, most specify that an employee may be late or even miss work entirely without facing termination or any other adverse employment action.

Some states mandate a maximum number of unpaid leave days that a volunteer can claim. But others may place more significant burdens on employers. In California, for instance, employers with 50 or more employees are required to grant up to 14 days of unpaid leave for training activities in addition to any leave taken to respond to emergency events. For multistate employers, keeping on top of what obligations may apply in each circumstance can be a challenge.

Significant Risks

Large or mid-sized employers may rely on absence management providers to keep them in compliance. For smaller employers though, it may be as simple as looking up a state’s law via Google to find out what’s required. However, checking in with the state department of labor or the company’s attorney may be the best way to get the correct facts.

“I would caution that just because you don’t find something [on the internet], it doesn’t mean it’s not there,” said absence management and employment law attorney Marti Cardi, vice president of Product Compliance for Matrix Absence Management.

For example, Cardi said, an obscure Texas law provides job-protected leave for volunteer ham radio operators called into service during an emergency.

Cardi said employers should task HR to investigate the laws in each state the company operates in, and to ensure that supervisors are educated about the existence of these laws.

“If a supervisor is told by one of his or her employees, ‘Sorry I’m not coming in today … I’ve been called to volunteer firefighter duty for the [nearby region] fire,’” she said, you want to be sure that the supervisor knows not to take action against the employee, and to contact HR for guidance.

“Training supervisors to be aware of this kind of absence is really important.”

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An employer that does terminate a protected volunteer for responding to an emergency may be ordered to pay back wages and reinstate the employee. In some cases, the employee may also be able to sue for wrongful termination.

And of course, “you don’t want to be the company in the headlines that is getting sued because you fired the volunteer firefighter,” she added.

If an employer bars a volunteer from responding, the worst-case scenario may be a third-party claim. Failure to comply with the law could give rise to a claim along the lines of “‘If you had complied with your statutory obligation to give Jane Doe time to respond, my loved one would not have died,’” explained Philadelphia-based Jonathan Segal, partner at law firm Duane Morris and managing principal of the Duane Morris Institute.

“That’s the claim I think is the largest in terms of legal risk.”

Even if no one dies or is seriously injured, he added, “there could still be significant reputational risk if an individual were to go to the media and say, ‘Look, I got called by the fire department and I wasn’t allowed to go.’”

The Right Thing to Do

What employers should be thinking about, Segal said, is that whether or not you have a legal obligation to provide job-protected leave for volunteer responders, “there’s still the question of what are the consequences if you don’t?”

Employee morale should be factored in, he said. The last thing any company wants is for employees to perceive it as insensitive to their interests or the interests of the community at large.

“Sometimes employers need to go beyond the law, and this is one of those times,” — Jonathan Segal, partner, Duane Morris; managing principal, Duane Morris Institute

“How is this going to resonate with my employees, with my workforce, how are people going to see this? These are all relevant factors to consider,” he said.

There’s an argument to be made for employers to look at the bigger picture when it comes to any volunteer responders on their payroll, said Segal.

“Sometimes employers need to go beyond the law, and this is one of those times,” he said. “Think about the case where’s there’s not a specific state law [for emergency responders] and you say to a volunteer, ‘No, you can’t leave to deal with this fire’ and then people die. You as an employer have potentially played a role, indirectly, because you didn’t allow the first responder or responders to go,” he said.

The bottom line is that “it’s the right thing to do, even if it’s not required by law,” agreed Cardi.

“I feel that companies should have a policy that they’re not going to discipline or discharge someone for absences due to this kind of civic service, subject to verification of course.”

Clear Policy

While most employers do strive to be good corporate citizens, it goes without question that employers need to guard their own interests. It’s not especially likely that volunteer responders will try to take advantage of the unpaid leave allowed them, but of course, it could happen.

That’s why it’s important to have policies that are aligned with state laws. Those policies could include:

  • Notifying the company of any volunteer affiliations either upon hire or as soon they are activated as volunteers.
  • Requiring that employees notify a supervisor as soon as possible if called to an emergency (state requirements vary).
  • Requiring documentation after the event from the head of the entity supervising the volunteer’s activities.

If at some point it becomes excessive – someone has responded to emergencies five times in nine weeks, then it’s time to examine the specifics of the law and have a discussion with the employee about what’s reasonable, said Segal. It may also be time to ask specifics about whether the person is volunteering each time, or are they being called.

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In some cases, the discussion may need to be about finding a middle ground, especially if an employee has taken on an excessively demanding volunteer role.

“We encourage volunteers to pick the style that best fits their schedule,” said Greta Gustafson, a representative of the American Red Cross. “Disaster volunteers can elect to respond to disasters locally, nationally, or even virtually, and each assignment varies in length — from responding overnight to a home fire in your community to deploying across the country for several weeks following a hurricane.

“The Red Cross encourages all volunteers to talk with their employers to determine their availability and to communicate this with their local Red Cross chapter.”

Segal suggests approaching it as an interactive dialogue — borrowing from the ADA. “Employers may need to open a discussion along the lines of ‘I need you here this week because this week we have a deliverable on Friday and you’re critical to that client deliverable,’” he said, but also identify when the employee’s absence would be less critical.

No doubt there will be tough calls. An employer may have its hands full just trying to meet basic customer needs and need all hands on deck.

“That may be a situation where you say, ‘First let me check the law,’” said Segal. If there’s a leave law that applies, “then I’m going to need to comply with it. If there’s not, then you may need to balance competing interests and say, ‘We need you here.’” &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]