Sasria Managing Director, Phyllis Mabasa, Paper ...

1 Sasria Managing Director, Phyllis mabasa , Paper presentation at the 15th African reinsurance Forum, Nairobi, Kenya Political risk insurance in Africa The Sasria Solution'. 1. POLITICAL RISKS INSURANCE BACKGROUND. Elements of Political and Credit Risk Insurance Political risk insurance is a type of insurance that can be taken out by businesses, of any size, against political risk the risk that revolution or other political conditions will result in a loss. In some insurance circles political risk is defined as coverage against financial losses in connection with cross-border trade and investment transactions due to governmental interference.

2 This may include risk that a sovereign host government will unexpectedly change the rules under which businesses operate. The insurance payout is usually aimed at covering damage to property or other assets ( due to fire), business interruption (standing charges or full loss of profit), and sometimes legal liability. Limits (on cover and territorial scope) and excesses are commonly built into contracts. Other losses which may be covered include: governmental expropriation or confiscation of assets governmental frustration or repudiation of contracts inconvertibility of foreign currency or the inability to repatriate funds Losses related to the following are often excluded: Ransom Nuclear/Biological/Chemical Pollution Fines and penalties Threat or hoax not resulting from the political risk Discrimination Political threat outside a given radius.

3 War For the purposes of the discussion in this Paper , the definition of political risks will include terrorism riots, strikes, and other forms of civil commotion within the country borders that may not necessarily have been caused by the government. As most global economies are maturing into democracies, the risks associated with freedom of expression ( strikes, public disorder, election violence, food riots, government policy protests) become imminent. Therefore providing insurance and reinsurance for individuals and corporates against such perils becomes imperative.

4 This Paper will discuss political risks in that context. Foreign creditors to any country face various credit risks which are directly or indirectly related to political risks. Sudden changes in legislation, outbreaks of war, unexpected political violence, and such events may render debtors (individuals or corporate) incapable of servicing their debts. As a result of these risks, credit risks insurance was designed specifically to cover losses resulting from political events. Many international companies see this type of credit risk as a must when doing business with emerging market countries.

5 For example, if an international company or institution invests money in a project in Africa, they may need assurance that they will receive their money back if political events cause project failure. Credit risk insurance may be used to protect the company. Protection against default for non-political reasons may or may not be covered under such policies. Appendix country risk rating ( business climate and country rating): Characteristics of Political Risks Events of a political nature are generally infrequent and often unpredictable.

6 However a single event may result in particularly large insurance losses. As a result, many political perils ( terrorism) are classified as catastrophic risks and underwriting these risks usually requires large amounts of capital. A common feature of political risks is clustering, where similar (and often coordinated). events may occur in different locations in the same time period. An example is the simultaneous food riots in Africa, Asia and Americas in the 2008 recession period. Geographical accumulations are usually of key importance when analyzing political risks (as is the case with other catastrophic risks).

7 As a result, major commercial centres (major shopping and entertainment centres, mines, oil refineries, etc.) are usually areas of greatest interest when analyzing risk exposure. Political Risks World Events and Impact The most notable event of recent times is the 9/11 attacks on the World Trade Centre and the Pentagon. Insurance losses related to these attacks amounted to US$ The main sources of loss were in the Business Interruption, Property Damage, and Liability. Other recent events of note include: 2004 Madrid train bombings 2006 Mumbai train bombings 2008 Taj Mahal bombings 2005 civil unrest in France (damage estimated at over US$200m).

8 The 2008 food protests in Haiti 2007 Mexico's Tortilla crisis Political Risks Africa Africa has not been immune to acts of terrorism and riots. In South Africa we have had numerous cases where angry commuters have set fire on trains and even train stations, leading to huge insurance losses. African events of note include: 2007 election riots in Kenya 2007 Algeria bombings 2008 US Embassy bombings in Kenya 2009 seizure of Meikles Africa by the Zimbabwean government November 2007 poverty related riots in Senegal Impact on Economies Political risks have far reaching economic and social impact worldwide.

9 Political risk can impact on number of key economic activities with a country including: Stock market Economic growth Consumer confidence Foreign direct investment The destruction of the physical assets was estimated in the US national accounts to amount US$14 billion for private businesses and billion for State and local government. Political risk may alter operating cash flows via discriminatory regulations as well as the investment via expropriation. 2. GLOBAL PERSPECTIVE ON POLITICAL RISK (RE) INSURANCE.

10 The World's Response To Political Risk Due to various political (and sometimes non-political) events, various countries decided to set up risk pools to insure political risks for local companies and individuals. The figure below shows a number of insurance pools that have been set up over the years. Following the 9/11 bombings most governments in developed markets took over the covering of political and terrorism risk. Australia's terrorism insurance scheme commenced on 1 July 2003. It applies to insurance for commercial property in Australia and associated business interruption losses and public liability claims.