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Credit and political risk claims review - 2018

Credit, Political Risk and Terrorism|Insurance Consulting and Technology

January 21, 2019

We predicted in 2017 a year of increasing political risk and claims activity and our forecasts quickly turned in to reality with 2018 claims activity being at its highest since 2015.

In the Willis Towers Watson: Oxford  Analytica 2018 Political Risk Survey Report 55% of respondents from companies with turnover greater than $1bn reported experiencing political risk losses, with 43% of those reporting losses greater than $100m. The old insurance adage of political risk losses being severe but infrequent surely has to be challenged now – while catastrophic political risk loss will always be a threat, is a greater level of meaningful claims activity over the entire cycle now the new norm?

Political risk losses are inevitable during a time of change. While Brexit negotiations provided a bumpy backdrop to European politics, the global stage proved equally challenging with ongoing talk of a global democratic recession. 2018 elections saw the Turkish president successfully re-elected, ushering in a new era of extensive executive power with the Turkish parliament weakened and opposition checked. In Brazil and Mexico populist presidents were elected from both sides of the political spectrum as electorates railed against years of embedded corruption and economic mismanagement. These changes, amongst many others, will leave investors facing many challenges. Already we are seeing an increasing risk of contract cancellation for existing projects for example the Mexico City airport project. States under populist control are also likely to increase anti-private sector rhetoric that may threaten investors particularly in the natural resources sector.

Trade has been further threatened by the beginnings of a US:China trade war and while negotiations continue between the two governments markets are likely to remain jittery. Any escalation could leave companies facing falling revenue, contract issues and tit-for-tat tariffs and if it escalates the world could feel far reaching impacts not only through an economically weakened China but also through contagion to other countries. In addition the US has imposed additional sanctions including on Iran, Russia, Saudi Arabia and Turkey.

Currency issues were a recurring theme in 2018, most notably with Turkey and Argentina being hit by currency volatility. Exchange transfer risk was the key reason behind political risk losses according to our 2018 survey with 58% of losses stemming from currency related issues. That lack of access to hard currency has also driven the increase in Willis Towers Watson 2018 claim activity, particularly in Africa.

Spotlight on Africa

African claims represented 85% of the Willis Towers Watson paid claims in 2018 – up from 41% in 2017, both as a result of hard currency shortages and non-payment by state owned sovereign companies. This uptick in Sovereign/contract frustration related losses is clear in the below graph:

Indeed if looking at Willis Towers Watson paid claims in Africa alone 93% have been contract frustration and political risk related and only 7% of losses are from credit or private sector related claims, which reflects that the appetite of insurers remains firmly in the more traditional political/sovereign risk space and private counterparty risk is still undeveloped.

The Willis Towers Watson loss data shows that over 50% of losses since 2008 have been in the natural resources sector, perhaps unsurprising given where much of Sub-Saharan African wealth lies.

Key African loss countries cited by the Berne Union in their 2017 loss statistics include Tanzania, Gabon, Egypt and Nigeria.

Willis Towers Watson USD paid claims since 2008 – by country

We have paid claims in 11 African countries with over $20,000,000 being paid in 5 African countries.

The increasing loss pattern being seen in Africa is also evidenced by the most recent Lloyd’s of London political risk claims data.

Lloyds Political Risk Paid Claims in Africa 1997-2017

Africa will likely remain in the claims headlines as several Sub-Saharan African countries continue to face high debt to GDP ratios with companies facing payment issues in countries like Angola, Mozambique, Ethiopia and Zambia and hard currency shortages remain.

So 2019 is all set to be another interesting year. The increasing polarisation of politics is a theme likely to continue with elections scheduled for countries including Argentina, Indonesia, Philippines and Nigeria. With that in mind claims patterns are likely to remain elevated over the coming months.

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