Golden Gate RIMS May 20, 2010

Transcription

1 Political Risk Management Golden Gate RIMS May 20, 2010

2 Curtis Ingram Vice President Marsh Political Risk & Structured Credit San Francisco, CA Roger Schwartz Senior Vice President Political Risk Aon Crisis Management New York, NY Sean Dunphy Vice President, Political Risk Chartis San Francisco, CA Edward Joyce Partner Orrick, Herrington & Sutcliffe New York, NY Sam Wilkin Oxford Analytica Oxford, England, UK 2

3 Introduction & Political Risk Overview Curtis Ingram Definition & Perils of Political Risks What Political Risk Looks Like Coverage & The Markets Roger Schwartz Risks and Coverage Identification Development of the PRI & TCI Markets (players, size, etc.) Products & Capacities Market Perspective Sean Dunphy Underwriting Pricing Claims Coverage form overview Edward Joyce Global Political Risk Outlook Sam Wilkin Questions 3

4 Introduction & Political Risk Overview Curtis Ingram Vice President Marsh Political Risk & Structured Credit San Francisco, CA

5 Many firms are not addressing adequately their expectations of increased political risk. Firms that outperformed their competitors paid significantly more attention to assessing and taking measures to manage political risk. Better performing companies, with better political risk assessment capabilities, also experienced fewer cases of expropriation, government payment default, import/export license cancellation, or currency transfer restriction than other firms in our sample. From "World investment prospects to Foreign direct investment and the challenge of political risk, a new report recently released from the Columbia Program on International Investment and the Economist Intelligence Unit. 5

6 2010 6

7 Major Constraints on Foreign Investment in Emerging Markets Percentage of Respondents Increased government intervention Limited market opportunities Infrastructure capacity Access to qualified staff Corruption Access to financing Macroeconomic instability Political risk In your opinion, which of the following factors will pose the greatest constraint on investments by your company in emerging markets this year and over the next three years? Source: MIGA-EIU Political Risk Survey Note: Percentages add up to more than 100 due to multiple selections. 7

8 Political Risk - Arbitrary or discriminatory actions, taken by home or host governments, political groups, or individuals, that have an adverse impact on international trade or investment transactions. Source: IRMI s Political Risk Insurance Guide by Daniel Wagner 8

9 How Can I reduce/manage political risk? Do business in Ohio, i.e., domestic only Use confirmed, irrevocable letter of credit or require cash in advance Have a local, joint venture partner Get government/multilateral support, e.g., World Bank, etc. Structure transaction to reduce risk Buy political risk insurance 9

10 Political Risk Insurance is used to protect foreign financial and real property assets against loss arising from government acts such as expropriation, inability to convert and transfer currency, terrorism, war, inability to import/export, license cancellation, loss of concession or contract rights and other political events. Insured financial assets can include loans, equity, and other types of investment. The real property can include equipment, leased assets, inventories in transit and property owned by the insured. Political Risk Insurance can also cover failure or refusal of government obligors to perform under cross-border (and in some cases domestic) contracts. This can include all types of performance and payment obligations. 10

11 Bolivia nationalizes oil and gas industry Argentina inhibits free flow of currency Rebels in Sierra Leone damage grain elevator with mortar fire Street riots damage a McDonald s in Indonesia Angola refuses to pay for services rendered Indian government breaches their contract with a foreign-owned power provider Russia cancels a mining license in Siberia Bangladesh calls a performance bond 11

12 Host government interference in private investments Political Violence (War, Terrorism, etc.) Contractual default by State-Owned Enterprise (SOE) / Public Obligor Host government interference in contracts between private entities Not all political risk is insurable! 12

13 Coverage & The Markets Roger Schwartz Senior Vice President Political Risk Aon Crisis Management New York, NY

14 Credit Political Risks Insolvency Protracted Default Contract Frustration Expropriation etc. Corporate Loans (Lenders Interest) Project Finance (Equity & Debt) Fixed Investment (Equity) Mobile Assets (Stocks & CCP) Commercial Default Sovereign Contractual Default Asset Risk 14

15 CEN&D, War, SRCC: Government action that deprives a company of all or part of its foreign assets (i.e. interferes with a company s ability to own & manage its investments) Physical damage losses caused by political violence (Generally excluded under existing property programs) Contract Frustration: Protects contractors operating overseas from a variety of political risks Currency Inconvertibility: Inability to convert local to hard currency and transfer it to a third country Business Interruption: Loss of Income and extra expenses resulting from CEN or Political Violence losses Trade Disruption Insurance (TDI): Supply Chain break causing Loss of Income and Extra Expenses resulting from Political Risks (and possibly other force majeure exposures) 15

16 Protects Foreign Investments including Mobile Equipment, Inventory, Operating Licenses or Concessions against: C/E/N, Selective Discrimination, Deprivation, Requisition, Willful Destruction, Abrogation of production, concession, tax agreements Strikes, Riots, Civil Commotion, War/Civil War and Terrorism Forced Abandonment Contingent Deprivation: Acts of government (home or foreign) that restrict import/export to/from Foreign Venture 16

17 Contract Frustration Insures Exporters or Importers of Goods and Services Sales Contracts Service Contracts Import Contracts Advance payment - failure to supply Tolling Barter (Confiscation for goods) Wrongful Calling of Standby Letters of Credit On demand bonds / guarantees / counter-indemnity's) Tender/ Bid bonds Performance Bonds Advance / progress payment bonds Retention maintenance bonds Others 17

18 Pre-shipment Buyer termination (Public) Failure to honor arbitration award Failure to comply with obligations Import/export embargo Cancellation of licenses Termination due to war, civil war, government interference Withdrawal of external funding Post-shipment Public Buyer non-payment Private Buyer non-payment & exchange transfer (politically motivated) Non-certification Non-honoring of Letters of Credit/payment guarantees Unfair calling cover Unfair calls Fair calls - political Non-honoring of arbitration award Capricious calls 18

19 Trade Disruption (TDI) provides a form of Business Interruption coverage that can act to fill in gaps existing in the Marine and Property programs. TDI s Marine and Property perils can be used to protect supply chains from interruption due to various Force Majeure (Acts of God) events. The Political Risk perils take the level of protection above those normally found in either of the two other programs The net result is a risk-transfer mechanism that mitigates consequential losses of profit, resultant extra expenses (from shifting production to alternative sites or suppliers) as well as any contractual penalties that might result from the break in the supply chain. Coverage is designed to provide loss of profit (if applicable) and/or extra expenses resulting from the termination or cessation of the project. 19

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23 Market Perspective Sean Dunphy Vice President, Political Risk Chartis San Francisco, CA

24 Limited information required for non-binding indication (NBI) of price, terms, capacity: Who: Insured What: Brief description of project or contract When: Tenor of contract Where: Country of Risk How Much: Amount of investment or contract 24

25 Host Country (e.g., Thailand vs. Kyrgyzstan) Experience of the investor, exporter, bank or project sponsor (i.e., who is the insured and what is their track record in the Host country) Sell locally/source locally Use of a joint venture structure (not always positive!) Participation in community development/rebuilding Well-written contracts tax provisions external arbitration Don t make a waiver of sovereign immunity bad contract better. local review by reputable law firm Project security Specific location Access control Security/Emergency plan 25

26 "It's the old story about the scent of the premium overcoming the stench of the risk. We do tend to get an awful lot of offers for business once a place has gone bad. But sometimes by then it's too late. Insurance is about the unforeseen, not the inevitable." Geoff Lynch, LSM, quoted in Reactions article of February

27 How is this product priced? Market Rates Emerging Market Bond Indices (EMBI) Credit Default Swaps (CDS) Relative risk (e.g., Mexico vs. Congo) Internal ratings (CEN, PV, CI, CF) House limits our credit rating committee How much does it cost? Most policies fall between 0.50% and 1.50% Per annum Rate on limit Eg: 0.50% on $10,000,000 = $50,000 Minimum Premium $25,000 WorldRisk (foreign package) 27

28 All private market claims considered confidential. Public market claims details more generally available ( Since the inception of this product line, Chartis has received 300 claims and paid $494 million. We have achieved recoveries of paid claims from third parties of $198 million. 28

29 : Berne Union members paid total claims of around $795 million Lloyd s syndicates reported to have paid about $608 million during the same period Recoveries over this period averaged around 45% Recoveries a key component of reinsurance and pricing Source: World Investment and Political Risk 2009, Multilateral Investment Guarantee Agency/ World Bank 29

30 Recent Claims Paid: Recent Recoveries: Argentina Argentina Tajikistan Dominican Republic Colombia Russia Dominican Republic Tajikistan China Morocco Venezuela Zimbabwe Zimbabwe Zambia Lebanon Philippines Serbia *Source: Berne Union Handbook 2008,

31 Known investment treaty arbitrations (cumulative and newly instituted cases), Source: IIA Monitor No. 1 (2009), United Nations Conference on Trade and Development (UNCTAD) 31

32 Argentina (48) Mexico (18) Czech Republic (15) Ecuador (14) Canada (13) United States (12) Ukraine (11) Poland (10) Egypt (9) India (9) Venezuela (9) Russia (8) Romania (7) Turkey (7) Georgia (6) Kazakhstan (6) Hungary (5) Moldova (5) Bolivia (5) DR Congo (4) Jordan (4) Chile (3) Costa Rica (3) Estonia (3) Kyrgyzstan (3) Pakistan (3) Albania (2) Algeria (2) Azerbaijan (2) Bangladesh (2) Burundi (2) Dominican Republic (2) Ghana (2) Latvia (2) Lebanon (2) Lithuania (2) Malaysia (2) Mongolia (2) Morocco (2) Paraguay(2) Peru (2) Philippines (2) Slovak Republic (2) Slovenia (2) Sri Lanka (2) UAE (2) Armenia (1) Bosnia (1) Bulgaria (1) Croatia (1) El Salvador (1) France (1) Gabon (1) Germany (1) Guatemala (1) Guyana (1) Indonesia (1) Iran (1) Myanmar (1) Nicaragua (1) Nigeria (1) Panama (1) Portugal (1) Saudi Arabia (1) Senegal (1) Serbia (1) Seychelles (1) South Africa (1) Spain (1) Thailand (1) Trinidad (1) Tunisia (1) UK (1) Tanzania (1) Uzbekistan (1) Vietnam (1) Yemen (1) Zimbabwe ( 1) Other (7) Total = 318 Source: IIA Monitor No. 1 (2009) UNCTAD 32

33 Coverage Form Overview Edward Joyce Partner Orrick, Herrington & Sutcliffe New York, NY

34 Insurance coverage for companies investing in foreign countries to protect against financial losses resulting from unpredictable actions of the host government Risks insured: Expropriation Government confiscation, expropriation or nationalization of the insured s investment Contract frustration (1) Host government s failure to perform or (2) acts by host government that prevent a private party from performing under contracts with the insured Currency inconvertibility Host government s acts that (1) prevent the insured from converting payments made in host country currency to currency used by the insured or (2) prevent the insured from transferring currency outside of the host country Political violence Physical damage to or loss of property resulting from politically motivated acts of violence, including terrorism, civil war and revolution Wrongful calling of guarantees/non-honoring of guarantees Unfair or wrongful calling of a guarantee by host government or failure of host government to honor its payment obligations 34

35 Public or quasi-public political risk insurers (approximately 52% of global PRI market): OPIC Multilateral Investment Guaranty Agency (MIGA) An international agency (part of the World Bank Group) established to promote direct investment into developing countries to support economic growth Private political risk insurers (remaining 48% of the market): Lloyd s Zurich Sovereign Risk Insurance Ltd. Chartis Chubb 35

36 Long policy periods ( tenors ) and large limits: OPIC Tenors of up to 20 years with limits of up to $250 million per project MIGA Tenors of up to 15 years with limits of up to $200 million Sovereign Tenors of up to 15 years and limits of up to $125 million Zurich Tenors of up to 15 years with limits of up to $150 million per transaction Chartis Tenors of up to 15 years with limits of up to $120 million OPIC and MIGA often form consortiums with private insurers to increase total limits for a project, and sometimes reinsure private insurers. 36

37 Grant of Coverage (OPIC Form): Compensation is payable for total expropriation... if an act or series of acts: (1) are attributable to a foreign governing authority; (2) are violations of international law (without regard to the availability of local remedies) or material breaches of local law; (3) directly deprive the Investor of fundamental rights in the insured investment; and (4) the violations of law are not remedied and the expropriatory effect continues for one year. 37

38 Likely Coverage Issues 1. Do expropriatory actions violate international law? A state is responsible for injury resulting from (1) a taking by the state of the property of a national of another state that (a) is discriminatory or (b) is not accompanied by provision for just compensation or (2) other arbitrary or discriminatory acts or omissions by the state that impair property or other economic interests of a national of another state. (Restatement (Third) of Foreign Relations Law of the United States) Country likely will argue that nationalism has not been discriminatory, as they have not singled out any specific nationality They also will argue that the foreign investors are receiving just compensation (e.g., both AES and Verizon will receive the market price at the time of the sale agreement for their shares) 2. Were the investors directly deprive[d]... [of their] fundamental rights in the insured investment? Country may argue that companies acted voluntary 38

39 What is the value of the loss? Amount of Compensation (under OPIC form): OPIC pays the book value of the insured investment, subject to adjustments and limitations. Compensation is computed as of the date the expropriatory effect commences and is based on financial statements maintained by the Insured in accordance with GAAP. 39

40 Adjustments that increase book value: Non-cash items contributed as part of the investment Adjustments that decrease book value: Compensation received from other sources on account of the expropriation; The book value of commercially viable property that the insured still owns after the expropriatory act (unless the insurer requires the insured to assign the property); and Any obligation the insured is relieved of by the expropriation. There are a number of other potential adjustments -- the insured should retain an expert on valuation. 40

41 Early notice requirement. The Insured must notify OPIC promptly of any acts or threats to act in a manner which may come within the scope of the expropriation coverage and shall keep OPIC informed as to all relevant developments. Limited time for filing claim. Must be filed within six months after the insured has reason to believe that a covered expropriation has taken place. Subrogation. Within sixty days after being notified of the amount to be compensated, and prior to payment, the Insured must transfer to OPIC all interests attributable to the insured investment, including claims arising out of the expropriation. Arbitration. Coverage disputes under OPIC policies must be settled by binding arbitration, initiated within one year, in Washington, DC, according to the prevailing Commercial Arbitration Rules of the American Arbitration Association. Coverage disputes under policies sold by private insurance companies may need to be resolved by binding arbitration in a certain location with a provision that states what law applies. 41

42 Self-Insurance. The insured bears the risk of loss of at least 10% of the book value of its interest in the foreign enterprise (OPIC form). Other Compensation. The insured shall not enter into any agreement with any foreign governing authority with respect to compensation for any acts within the scope of coverage without OPIC's prior written consent. Suit/Arbitration Limitation Provision. The insured must commence an against the Company within a certain period of time (i.e. 12 months, 24 months, etc.) Other Insurance. Are the insured s all risk insurance policy and political risk insurance policy in synch? Date of Loss, Waiting Periods and Deductibles. 42

43 Global Political Risk Outlook Sam Wilkin Oxford Analytica Oxford, England, UK

44 GLOBAL POLITICAL RISK OUTLOOK Projected GDP growth, CONFIDENTIAL 44 44

45 GLOBAL POLITICAL RISK OUTLOOK MIEWS data on 35 emerging markets Export growth, 35 emerging markets Credit growth, 35 emerging markets Source: MIEWS, CONFIDENTIAL 45 45

46 GLOBAL POLITICAL RISK OUTLOOK MIEWS countries at greatest risk, Q Number of Stress Signals Countries 9 Bulgaria ( ), Lithuania ( ) Chile ( ), India ( ) 8 Croatia ( ) 7 Brazil ( ), Hungary ( ) 6 Israel (-), Slovenia (-) 5 or fewer Estonia ( ), Russia ( ), Romania( ), Slovakia( ), Czech Rep( ) Source: MIEWS, CONFIDENTIAL 46 46

47 GLOBAL POLITICAL RISK OUTLOOK Source: Aon/Oxford Analytica Political Risk Map CONFIDENTIAL 47 47

48 GLOBAL POLITICAL RISK OUTLOOK Source: Aon/ Oxford Analytica Political Risk Map CONFIDENTIAL 48 48

49 GLOBAL POLITICAL RISK OUTLOOK Source: Aon/Oxford Analytica Political Risk Map CONFIDENTIAL 49 49

50 GLOBAL POLITICAL RISK OUTLOOK Africa Source: Aon/Oxford Analytica Political Risk Map CONFIDENTIAL 50 50

51 GLOBAL POLITICAL RISK OUTLOOK Source: Aon/Oxford Analytica Political Risk Map CONFIDENTIAL 51 51

52 GLOBAL POLITICAL RISK OUTLOOK Source: Ernst & Young/Oxford Analytica Business Risk Reports CONFIDENTIAL 52 52

53 GLOBAL POLITICAL RISK OUTLOOK Source: IMF 53

54 Countries that would be most impacted by an increase in the cost of borrowing, 2010 Liberia Samoa Kazakhstan Latvia Seychelles Bulgaria Mauritania Moldova Serbia Ukraine Romania Poland Macedonia, FYR Chile Jamaica Countries at greatest risk from a shock to global credit markets, 2008 Latvia Turkey Hungary Croatia Lebanon Lithuania Romania Estonia Ghana Slovenia Costa Rica Jordan Bulgaria Jamaica Slovakia Source: IMF; Oxford Analytica 54

55 GLOBAL POLITICAL RISK OUTLOOK CONFIDENTIAL 55 55

56 Oxford Analytica 5 Alfred Street Oxford OX1 4EH United Kingdom Tel: Fax: CONFIDENTIAL 56 56

57 Thank You! THE DATA CONTAINED IN THIS PRESENTATION ARE FOR GENERAL INFORMATIONAL PURPOSES ONLY. ANY INSURANCE PRODUCT OR SERVICE. THE INFORMATION CONTAINED HEREIN HAS BEEN COMPILED FROM SOURCES BELIEVED TO BE RELIABLE. NO WARRANTY, GUARANTEE, OR REPRESENTATION, EITHER EXPRESSED OR IMPLIED, IS MADE AS TO THE CORRECTNESS OR SUFFICIENCY OF ANY REPRESENTATION CONTAINED HEREIN. 57