How Political Risk and Credit Insurance Protects Enterprises Doing Business in Emerging and Developed Markets

Carriers see room for growth in political risk and credit lines whose rates have remained relatively stable.

Globally, countries are investing in infrastructure.

From renewable energy and transportation to telecommunications and agriculture, projects abound — and for good reason: The World Economic Forum reports that investment in clean energy systems in emerging markets needs to triple by the early 2030s.

Here in America, governments are investing in updating roads and bridges as part of the Bipartisan Infrastructure Bill, and companies are investing in projects that lay fiber optic cable underground to increase internet speed and connectivity. Meanwhile, a growing number of large new data centers are being built by U.S. construction firms to support the country’s growing data storage needs.

“There’s currently a sizable increase in project financing going on in infrastructure, and we’re seeing that both in emerging markets and in developed markets,” said Dan Riordan, head of political risk and credit, MSIG USA. “Strategic investors, banks, multilateral agencies and development finance institutions see great opportunity in many of these projects: transportation, renewable energy, agriculture, health care, you name it.”

When large public or private entities finance these projects, they’re often taking on medium- to long-term risk. They want to protect themselves in case a project experiences unforeseen political or commercial risks. These can include expropriating acts, currency or transfer issues, political violence, or delayed or missed payments. In these cases, many are turning to political risk and credit insurance policies to protect their money and continue to support these ventures.

A Burgeoning Political Risk Market

Political risk and credit insurance offers coverage to public and private insureds who are investing or lending to infrastructure projects, or are seeking cover for the export of goods and services. It protects them against political risks and, in many cases, nonpayment of a financial obligation.

“They’re often looking to manage the exposure limits that they have,” Riordan said. “They tend to want to come into the insurance market to buy political risk and credit coverage so that they can reduce the overall amount of exposure they have to a specific country, region, industry sector or borrower.”

These insurance policies are often purchased by public and private investors and financial institutions that are doing business in emerging economies. Riordan estimates that 70 to 80% of market demand comes from the emerging markets in Asia, Africa, the Middle East and Latin America. However, there is growing demand from developed markets such as the U.S., UK and Europe.

“We’re seeing there’s strong interest in many of the developed markets, even in North America,” Riordan said.

One example of projects that need coverage in North America: underground fiber optic cable ventures. These projects, which are taking place around the U.S., will help increase high-speed internet access and are necessary for our digitally connected world. Banks and other entities financing these projects want to make sure they’re protected via credit insurance.

“Fiber and data centers enhance our ability to transmit and store vast amounts of data, and many huge investments in these areas are going on right now,” Riordan said. “They’re doing that not only in the U.S. but throughout the UK and Europe, as well as in some key emerging markets.”

Stable Rates, Room to Grow

Per Riordan, “pricing for political risk has always remained pretty stable.” Rates in the market tend to be between 1 and 3% per annum, with some exceptions.

Dan Riordan, head of political risk and credit, MSIG USA

“They can fluctuate within that band a bit, but they don’t change that much. Part of the reason is that a lot of underwriters are really looking at underwriting selected insureds and specific project and country risks. If you’re going to be underwriting an infrastructure project with a financing plan involving 10-to-20-year risk in an emerging market, some people might say ‘Run for the hills. How can you know what’s going to happen during that long-term period?’ ” Riordan said.

“Well, you can’t predict the future, but you do know who your insured is. You want to find clients and customers for these products who are larger, very engaged players in the markets, who’ve got vast experience and have been there for many, many years.”

There are some exceptions. Riordan notes that political risk and credit policies covering projects or trade in high-demand countries like Turkey can face capacity issues. Turkey has a large, powerful economy and is a major exporter, Riordan said, but it has faced additional exposures due to geopolitical conflict in the Middle East.

“That’s an area where we have seen the rates go up and down, but it’s generally a country capacity issue,” Riordan said. “Premium doesn’t solve all the problems, so that’s why the risk selection still has to come to the fore.”

With generally stable rates and increased investment in infrastructure, carriers are seeing room to expand in the political risk and credit area. “There’s actually room to grow the market,” Riordan said.

Earlier this summer, MSIG USA expanded its own political risk and credit team with the addition of Riordan, Richard Abizaid and Javier Gomez. Abizaid and Gomez are senior underwriters.

“We are covering political risks over long periods of time, usually starting three to five years out and up to as long as 10 to 20 years, and when you’re providing that support, you have to underwrite the transaction early and then live with those results over a long period of time,” Riordan said.

Innovating Political Risk and Credit

Traditionally, political risk and credit has covered short-term, multi-buyer situations. Banks working with a variety of exporters want to protect against nonpayment.

“That’s where you had an exporter who would have a plethora of buyers and take risk on them each time they provide their product. Will they get paid?” Riordan said.

Protecting against those situations is important for investors, but short-term, multi-buyer products aren’t necessarily built for businesses who have long-term relationships with clients. Banks providing project financing or infrastructure loans want to maintain long-term relationships with their clients. If someone misses a payment, banks may want to utilize their insurance coverage, but not at the expense of the account.

“For example, the client may have hit a rough spot, but they typically want to keep them and come back to them,” Riordan said. Most insurers recognize these situations and seek to provide flexibility to extend payment terms to account for short-term financing payment gaps.

“With medium- to long-term policies, insurers and their clients need to establish an enduring partnership,” Riordan said. “Credit and political risk insurance allows financial institutions to manage their internal exposure limits on key clients — enabling them to better serve those clients with future transactions.”

Political risk and credit insureds are often looking for carriers who respond to their specific needs. Depending on which countries or projects they’re doing business in, they’ll need distinct policies to cover their risks.

“We’ve got to provide a product that’s meaningful to them,” Riordan said, “not an off-the-shelf product but a bespoke product that has the basic tenets of political risk or credit insurance coverage but can be used for different purposes.” &

Courtney DuChene is a freelance journalist based in Philadelphia. She can be reached at [email protected].

Making the Connection: Are You Prepared for Rising Property and Equipment Breakdown Costs?

Property’s biggest risk factors can directly impact the price of equipment repairs. Risk management and loss prevention start when insureds make the connection with valuations and work with the right partner to mitigate their potential impact.

By: AXA XL | October 1, 2024

The commercial property insurance market has had its ups and downs in recent years. The good news is that property rates seem to have stabilized in the second quarter of 2024, though businesses are still seeing single-digit increases. It’s a reminder for businesses to keep an eye on their property exposures, especially when it comes to the large equipment they use to keep their operations running.

Equipment breakdown can lead to property damage, business interruption, and additional expenses for repair or replacement. This can increase the overall cost of property risks, as organizations need to account for the potential consequences of equipment breakdown when assessing their property risk management strategies.

Today’s business equipment is more high-tech and specialized than ever before, making unforeseen breakdowns, malfunctions or damages a substantial risk, should they occur. Even the most well-maintained piece of equipment can experience mishaps and cause significant financial loss.

“The changing nature of property risks, especially with high-tech equipment in distribution centers and electronic sorting equipment, is a significant factor contributing to an increase in insured property losses,” said Michele Sansone, CUO property, Americas, AXA XL.

“The equipment breakdown aspect is critical. If specialized machinery is the only source and there is no backup, it creates significant exposures for the business,” added Cheryl Geidel, vice president, equipment breakdown, AXA XL.

The value of complex equipment continues to climb alongside the cost of fixing it, as more expensive replacement parts and specialized diagnostic technicians contribute to an uptick in pricing. Coupled with the recent strain on property insurance, this is one risk businesses can’t afford to overlook.

For those operating large machinery and other equipment that requires regular maintenance, it is imperative to get ahead of potential breakdown and disruption, and to make sure they have the right risk mitigation tools in place.

Two Key Factors Impacting Property Rates

Michele Sansone, CUO Property, Americas, AXA XL

The first piece of the equipment protection puzzle is the need to understand exactly what is affecting property rates and, consequently, pricing.

Verisk’s 2024 Global Modeled Catastrophe Losses reported that the average annual loss from global natural catastrophes has reached a new high of $151 billion. In the past five years, the actual annual insured losses from natural catastrophes averaged $106 billion, compared with less than $83 billion in the preceding five-year period.

“The pricing in the catastrophe insurance market is highly dependent on the specific peril being insured. With the increased frequency and severity of catastrophic events, insurers are seeing a significant uptick in activity in this segment,” said Sansone.

“As a result, pricing is being adjusted to account for the heightened risk exposure. The specific rates will vary based on the particular catastrophe being covered, such as hurricanes, wildfires or floods.”

That can place rates at the mercy of Mother Nature — a challenge that’s led some insureds to take on their own risk.

“To control pricing, customers are increasingly retaining more risk through captives or larger deductibles, removing exposure from the market,” Sansone explained.

Supply chain disruption is another big factor: “Supply chain issues and long lead times for components and equipment have created challenges, often extending business interruption periods to 15 to 18 months while waiting for critical parts to arrive,” Geidel said.

Supply chain delays aren’t the only things causing strife; the rising cost of materials and labor do as well. These factors continue to impact property insurance, driving up the frequency and cost of claims and drawing attention to contingent business interruption risks.

“Insureds often don’t fully understand the origin of their equipment, products or stock. We view this lack of information as a significant risk — one that must be addressed,” Sansone said.

Accurate Valuations Are Everything

Cheryl Geidel, Vice President, Equipment Breakdown, AXA XL

Another element businesses have to understand is that accurate valuation of property goes a long way in managing the cost of equipment breakdown. Even with rates showing a slow decline, it’s essential to have accurate values for property, including equipment value.

“Regardless of whether the rate is two cents or ten cents, the starting point — the values — must be accurate. There seems to be a misplaced sense of relief in the industry that as pricing declines, the valuation issue will resolve itself. However, the fundamental importance of getting the values right remains unchanged,” Sansone explained.

If a business and its equipment are underinsured due to an incorrect valuation, the insurance payout may not cover the full cost of repair or replacement.

Further, because of today’s higher rebuilding, repair and replacement costs, businesses must be particularly wary about their policy limits. A loss could end up costing significantly more than anticipated, causing insureds to quickly erode any sublimits in place.

“It’s a challenging discussion, especially as the market softens and the focus on values diminishes,” said Sansone.

However, this is one area where all insureds can get ahead. Partnering with insurance professionals will ensure the right questions are being asked and accurate values are being reported. Risk managers, brokers, the account executive and producer all have a role to play in helping the insured to understand their exposures.

Valuating individual equipment can be tricky, noted Geidel, especially as more technology is incorporated into the machinery being used.

Breakdowns or failures often involve individual pieces of equipment rather than an entire building. Insurance partners that ask questions, review and compare values year-over-year on equipment types and rely on risk engineering reports to better understand the equipment being used are a boon to the underwriting process.

“Values are the basis of everything an underwriter does, so focusing on values should be the starting point of the process,” Geidel said.

An Emphasis on Protecting Property and Equipment

Technology is enabling property owners to place a larger emphasis on protection. The unpredictability of hurricanes, earthquakes, wildfires and other Nat CATs can’t be controlled, but technology offers some control over their impact.

Advanced weather modeling, wildfire modeling, drone inspections and other innovations help to predict and assess damages more quickly and accurately than ever before.

Sansone also said that data-sharing can build resiliency into the market, putting clients in an even better position should an incident arise.

“There’s an unfortunate perception that data is proprietary and sharing it could undermine one’s competitive advantage. However,” she said, “this reluctance to share data can hinder the industry as a whole.”

Collaboration and data-sharing among carriers could open the door for better risk assessment and improved underwriting practices, in addition to resiliency.

“Transparency is a game changer in risk management. Sharing data can greatly improve how organizations handle and reduce risks,” said Sansone.

Property Risk Engineering at Its Finest

Effective risk management makes clients better, which ultimately improves their overall risk profile. At AXA XL, the team takes this philosophy and brings it into everything it does. It’s not about a transaction; it’s about maintaining relationships with customers in order to best protect them.

“When we commit to a piece of business, we aim to maintain that relationship. Our focus is on risk improvement rather than just transactions so that we may build lasting partnerships with our clients,” Sansone said.

AXA XL has done this by building a team of more than 400 risk engineers who work closely with underwriting in order to provide the most accurate and detailed insights about each client’s needs.

“Our underwriters rely on the data and insights that our property risk engineers collect on site to price the risk we assume. But we also share the data they collect with our clients to help them in their loss control efforts as well as our own,” Geidel said.

“Our approach to underwriting and risk evaluation streamlines the claims process in several ways. By engaging in bespoke underwriting and thoroughly assessing each risk, we gain a deep understanding of the potential claims scenarios from the outset,” Sansone added.

This comprehensive risk evaluation allows AXA XL to anticipate and prepare for potential claims more effectively. As a result, when a claim does occur, the team is well-equipped to handle it efficiently, because its process has established a clear understanding of the underlying risk factors and policy details.

To learn more, visit: https://axaxl.com/insurance/products/machinery-breakdown-insurance.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with AXA XL. The editorial staff of Risk & Insurance had no role in its preparation.

AXA XL, the property & casualty and specialty risk division of AXA, provides insurance and risk management products and services for mid-sized companies through to large multinationals, and reinsurance solutions to insurance companies globally. We partner with those who move the world forward. To learn more, visit www.axaxl.com.