Sponsored: AXA XL
3 Trends Threatening Post-COVID Economic Growth and Why Having the Right Insurance Partner Is Critical
With the influx of COVID-19 vaccines, much of the world is embarking on post-pandemic economic recovery. In the U.S., for example, the Biden Administration is directing more than $500 billion toward new infrastructure projects meant to generate millions of jobs and boost growth of transportation infrastructure, energy, including the renewable energy sector, K-12 schools among other investments. It has also devoted millions more to state and local governments to support local recovery efforts.
But a cloud of uncertainty hangs over these promising initiatives.
Many businesses are still on unstable financial footing due to pandemic-induced disruptions and losses. Stalled vaccination efforts in some emerging and developed countries and the emergence of new variants mean the possibility of another COVID-19 surge. Increased political volatility and anti-government protests around the globe also threaten foreign investments.
This convergence of recovery with adverse macroeconomic trends underscores the need for flexible and responsive insurance products, including political and credit risk policies as well as commercial bonds.
Here are three examples of how the risk landscape is shifting in 2021, and how the right insurance products can help to mitigate instability and uncertainty.
Trend #1: Political Change Threatens Business in Emerging Markets
Shifts of power always come with the possibility of new regulations, new attitudes toward foreign investors, and new economic priorities overall. All with the potential to complicate business relationships with multinational enterprises.
“Peru, for example, that just went through a presidential election run-off, and the lead candidate who is set to be confirmed, strongly believes in a bigger role of the state,” said Lian Phua, Head of Americas in AXA XL’s Political Risk, Credit and Bond division. “Peru is a mineral-rich country, and several foreign mining companies have invested there. There is a heightened concern now that the new administration will alter the terms of their contracts with these foreign investors or impose new regulations on the industry, which could have an impact on revenues or repatriation of dividends back to the investors’ host countries.”
Similar trends are unfolding in other emerging markets such as Chile and Mexico, where leaders are pursuing constitutional rewrites and legislative changes. Earlier this year Mexico’s president, for example, passed legislation increasing the risk of the renegotiation of contracts signed by foreign power generation developers potentially reducing their profit margins, which would inhibit power developers’ ability to generate sufficient revenues.
“Many of our clients are concerned about the increasing rule of a host country’s government in the private sector,” Phua said.
- Solution: Political Risk Insurance. Political risk coverage that is tailored to a company’s unique exposures in a given political climate can provide protection against a variety of actions, including expropriation of assets, currency inconvertibility or political violence. A political risk policy can provide peace of mind and give investors and multinational companies more confidence in their overseas operations.
Trend #2: Pandemic-Related Losses Scare Off Lenders
Certain sectors suffered more than others from government-mandated shutdowns and travel restrictions during the pandemic.
Analysts estimate that U.S. airlines lost at least $35 billion. The retail sector laid off roughly 40 million workers. The construction industry, on the other hand, saw increased demand for residential units as people fled big cities for more spacious suburbs and can anticipate an influx of infrastructure projects — but is still dealing with supply chain disruptions and subsequent increased material costs.
In any case, businesses are balancing plans for growth against the effects of economic recession and a degree of uncertainty over the rate of recovery. Many lenders constantly assess the scenario of a downward spiral of economic instability.
“We have seen an increase in credit risk that is very sector-specific. In some cases, it may be transient. Certain airlines, for example, have begun to recover as travel picks up again adjusting to the new demand. But retail, which has been struggling from a shift to e-commerce even before the pandemic, is a different risk,” Phua said. “We would look very closely at the specific exposures for banks and our other financial institution clients lending to these at-risk sectors when analyzing new risks.”
- Solution: Credit Risk Insurance. Credit insurance protects lenders against non-payment by their borrower. Similar to political risk insurance, it acts as a buffer against uncertainty, allowing lenders to do business more confidently. This also means borrowers can continue to access liquidity from their lenders.
Trend #3: Rapid Recovery Presents Liquidity Challenges
Businesses looking to take advantage of growth opportunities need capital to invest in new equipment, new employees and all their associated costs. But for emerging industries or those negatively impacted by the recession, that capital may be in short supply, driving increased reliance on credit and surety arrangements.
The renewable energy sector is an example of an industry crunched for liquidity.
“This industry used to be more risky as some companies were not yet financially stable while competing with other economical sources of energy. But now with continued policy support, tax breaks, subsidies, increases in efficiency and sharp reduction in technology costs, the solar and wind power industries are set to grow quickly,” said Maria Duhart, Head of Commercial Bonds in AXA XL’s Political Risk, Credit & Bond division.
Equipment, however, remains big, expensive and difficult to transport. And renewable energy still only accounts for about 12% of total U.S. energy consumption and about 20% of electricity generation.
Despite increased demand and investment, renewable energy suppliers still face hurdles that require financial flexibility to get projects up and running. And buyers need to be assured of consistent energy supply.
- Solution: Commercial Bonds. Commercial bonds can guarantee a variety of obligations, including proper equipment installation, timely supply of materials or services, adherence to product performance standards, appropriate project decommissioning, workers’ compensation self-insurance retentions, customs clearance and service provider payment, among others. As an alternative to credit-based guarantees, bonds free up liquidity while still providing the assurances that companies need to run their business. Bonds allow businesses to grow while maintaining capacity in their lines of credit.
Data-Driven Underwriting Helps to Mitigate Uncertainty
Managing political and credit risks is complicated, especially in a constantly shifting political and economic environment. Insurers that invest resources in understanding these risks on a granular level are better able to spot trends, identify exposures and tailor solutions to meet a client’s specific needs.
“We have a platform to collate the data from different sources, including mainstream tools like S&P or IHS market intelligence, along with information directly from insureds. In many cases, they are following closely what’s going on at a local level in the areas they are looking to conduct business in. We can put all of that together in a usable way that allows us to examine and underwrite risks in a more bespoke fashion,” Phua said.
A dedicated risk analysis team also examines credit market performance, liquidity status, investments and overall industry trends within a client’s sector, helping them to make informed decisions about new opportunities or transactions. Detailed data also supports more accurate policy pricing.
A team of risk engineers also performs loss control analysis to help insureds fulfill the terms of bonds. For example, a mining company may have a reclamation bond that guarantees that the land will be restored once the mine is depleted. Risk engineers will visit the site, evaluate the company’s policies and procedures, and examine any environmental protections in place to assess their ability to make good on that bond.
“This data helps us tackle what might be on the surface a very challenging risk. We can hone-in on the specific concerns of the client and then sculpt a product or solution from there,” Duhart said. “The ability to collect and apply data so granularly is really unique to AXA XL.”
Whether a company needs a political risk policy, credit risk policy, commercial bond or all three, AXA XL’s underwriters are equipped with the information to help clients navigate a complex risk landscape.
To learn more about AXA XL, visit them at https://axaxl.com/insurance/products/political-risk-and-credit-insurance or https://axaxl.com/commercial-bonds-partner.
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.