Getting Past the Headlines: How to Grow Your Business in Turbulent Geopolitical Times GRM014

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2 Getting Past the Headlines: How to Grow Your Business in Turbulent Geopolitical Times GRM014 Speakers: David Anderson, Zurich Judy McInerny, Director Risk Management, Corning Incorporated

3 Learning Objectives At the end of this session, you will: Experience how a major multinational approached analysis of its country risk exposures using tools, methodology and the stakeholders involved Delve into what are the various types of risk mitigation to consider depending on the outcome of the analysis Understand what political risk insurance covers and does not cover, claims, roles for the captive and what current events mean for risk managers today

4 Corning,Inc. Brief Introduction One of world s leading innovators in materials science specialty glass, ceramics, optical physics 30,000 employees worldwide $30 billion in total assets Significant R&D, manufacturing, and supply chain in emerging markets

5 Factors Considered Country Risk Corning Countries ONDD Expropriation Zurich Willis Risk Index Room ONDD (War) Political Violence Zurich Risk Room (PV) Willis Index (PV) Willis Index Zurich Risk Room China (CN) Korea (KR) Mexico (MX) South Africa (ZA) Taiwan (TW) Turkey (TR) Brazil (BR) Israel India (IN) Poland (PL) Russia (RU) Thailand (TH) Hungary (HU) * Values as per most recent reported numbers for FY '13 Terrorism SCALE DETAILS: The ONDD's Political Risk Summary Table measures country risk using a scale between 1-7 with 1 representing Low Risk and 7 representing High Risk. The Zurich Risk Room Reports measures country risk using a scale between with 0.0 representing Low Risk and 1.0 representing High Risk. The Willis Political Risk Index measures country risk using a "Risk Temperature Scale" beginning with 5 (Extremely Low) and increasing in intervals of 10 all the way up to 95 (Extremely High). Note: The index is published three times per year and is comp KEY: HIGH RISK MODERATE RISK MINIMAL RISK

6 Country Risk Tools Corning, and Investors in emerging countries in general, use several methods to mitigate risk Mechanisms used to Mitigate Political Risk (percent) Multilateral Investment Guarantee Agency (MIGA) World Bank Group 2013 Survey Results 15% of MIGA s survey respondents use insurance as a strategy to mitigate political risk 459 survey respondents Often, financial institutions require their borrowers to purchase coverage

7 Political Risk Insurance at Corning Long history of purchasing political risk insurance program Over time, values grew to exceed available insurance capacity Robust analysis and debate at C-suite level

8 2013 Political Risk Program Historically the program had been modified to optimize insurance capacity, terms and conditions, and pricing $125M 1 st Insurer $100M 2 nd Insurer Countries Covered China Korea Mexico South Africa Taiwan Turkey Brazil Israel India Poland Russia Thailand Hungary Investment and asset values in several countries exceed available insurance Pricing benefit for purchasing CEN with PV can be purchased separately Other coverages available: Trade Credit, Contract Frustration

9 Corning s Approach Variety of tools available to meet different country risk challenges Country mix is important in the analysis Types of assets, locations, and industrial sector are key considerations

10 Political Risk Insurance and Perspectives from Zurich Insurance Group The informahon in this presentahon was compiled from sources believed to be reliable for informahonal purposes only. Any and all informahon contained herein is not intended to conshtute advice (parhcularly not legal advice). Accordingly, persons requiring advice should consult independent advisors when developing programs and policies. We do not guarantee the accuracy of this informahon or any results and further assume no liability in connechon with this presentahon. We undertake no obligahon to publicly update or revise any of this informahon, whether to reflect new informahon, future developments, events or circumstances or otherwise.

11 Political risk on the C-suite agenda The World Economic Forum s 2015 Global Risk Report*, for the first time, identified geopolitical risks as three of the top five risks in terms of likelihood: Interstate conflict with regional consequences Failure of national governance State collapse or crisis McKinsey s December 2014 survey** showed increase from 27% in 2013 to 70% in 2014 of executives who say that geopolitical risk is a threat to global growth * ** economic_conditions_snapshot_december_2014_mckinsey_global_survey_results 11

12 Year Political risk insurance a brief history Brief History Post World War II US Congress conceptualizes polihcal risk insurance (PRI) as part of Marshall Plan 1960s 1970s US government begins offering PRI through Overseas Private Investment CorporaHon (OPIC) Private sector enters PRI market, large scale expropriahon claims, growth of non- US government polihcal risk insurers 1980s 1990s 2000s 2010s Large scale currency inconverhbility claims : PoliHcal violence claims, largest PRI claim: CalEnergy / Indonesia expropriahon / AAD in 1997 Benign environment unhl 2009 (PRI insurers not exposed to WTC, Iraq, or Afghanistan) à massive credit claims from global financial crisis Global instability leads to increasing PRI claims 12

13 Political risk insurance perils insured Political Violence: Damage or loss of assets and the related loss of income (business interruption) due to war, civil war, revolution, terrorism or other politically-motivated acts of violence. NOT COVERED ON PROPERTY PRORGAMS. Confiscation, Expropriation, Nationalization: The unlawful taking by the host government of an Insureds operations without compensation Includes Investor s equity and assets (including bank accounts) Inability to export goods from a foreign investment or to repatriate mobile assets Other government actions that deny the fundamental rights of an investor to operate its investment causing a permanent cessation or abandonment of the operations 13

14 Perils insured cont d Currency Inconvertibility and Non Transfer Risk: The inability to convert foreign currency earnings or proceeds from the sale of assets or its investment into hard currency and transfer those earnings from a foreign country. Forced Abandonment: The necessary and complete abandonment of the foreign operations due to sustained political violence in the host country. Does not require physical damage to assets of the foreign operation. Other perils: Forced divestiture Selective discrimination License cancelation 14

15 Perils insured for contracts Contract Frustration: Covers both pre-shipment risks, such as embargo and unilateral termination, and post-shipment nonpayment by a government buyer of goods or services under commercial contract Arbitral Award Default: The non payment by a government of a final and binding arbitral award in favor of the Insured. Covers commercial contracts between an investor and a government (i.e. power purchase agreement, mining concession agreement, production sharing agreement) 15

16 Forms of political risk coverage Multi-Country Policies A multi-country policy can cover a company s subsidiaries, facilities and other assets (e.g. inventory) in multiple countries against a broad range of political risks on one policy Insured is the customer s head office, but losses arise from events in emerging markets Typically, locally issued policies are not needed Single Project Coverage A single policy for a single project, usually in a single location Common for natural resources extraction, power sectors 16

17 Claims: The Shift to Political Risk Losses saw dramatic decrease in rate of new credit insurance payment default notifications, and marked increase in new notifications of Political Risk events: o Redshirt protests in Bangkok o Arab Spring o Ongoing violence in MENA o Eastern Ukraine o CEN (Venezuela, Argentina) o Political Violence (Thailand, Afghanistan, Ukraine, Libya, CAR, Ivory Coast) o CI (Venezuela) o Non-Honoring/CF (Venezuela, Russia, Kazakhstan, Belize, UAE, Gambia, Vietnam, St. Kitts)

18 Zurich Credit & Political Risk Paid Claim Trend: TCI vs. PRI Political Risk Trade Credit YTD

19 Political Violence Count of PV losses arising since 2010: Year # of PV losses Countries Afghanistan, Thailand Afghanistan, Libya, Egypt, Ivory Coast Central African Republic, Libya Libya, Ukraine Over $250M in PV claims paid/under evaluation since 2011 Insureds Losses resulted from: Physical Damage Business Interruption resulting from PD Looting Evacuation/Protection costs

20 Emerging Issue: Using the Captive Example: Political risk insurance for global drilling company Single policy issued by captive $90 million reinsurance limit provided by Zurich (100% indemnity excess of deduchble) $10 million deduchble retained by caphve 20

21 Using the Captive: Perceived Benefits Diversification of risk in the captive Additional premium income Captive protected from catastrophic loss by reinsurance Arms-length pricing provided by insurer Risk manager provided global financial risk solution Single policy issued by captive Policy period 3 years with non-cancelable terms Policy wording tailored to customer s needs political violence (including war and civil war), expropriation, violence 21

22 Looking Ahead Continued low energy prices Iran deal? ISIS inspiring like-minded groups Ukraine / Russian periphery Venezuela downward spiral Whither Brazil?

23 Principles for Risk Managers to Consider Unpredictability of political risk Low frequency, high severity Velocity Interconnectedness Resilience

24 Thank You