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Insurers Risk Political Risk Insurance

By Patience Saghana
Insurers across the African Continent are bracing up to venture into the  the delicate and risky business of political insurance as a means of curbing  the huge loses associated with  political violence, terrorism acts and internal war.

The loses associated which usually run into billions of dollars are not and cannot be covered by traditional insurance products but by political risk insurance. Political risk insurance policy covers assets destroyed in the event of civil war or any political oriented unrest. Political risks have far reaching economic and social impact worldwide. Political risk can impact on number of key economic activities with a country including: Stock market; Economic growth; Consumer confidence and foreign direct investment. Political risk may alter operating cash flows via discriminatory regulations as well as the investment via expropriation.

But because of the high risk involved they attract high premium. Also because of the risky nature and huge claims involved, African insurance have show little or no interest in political risk insurance. Consequently, the political risk element of major investment projects in the continent are handled by international finance  companies.

For instance, a consortium of private companies led by Chevron financed the development of a 680 kilometer gas pipeline linking gas from fields in Nigeria to markets in Benin , Togo , and Ghana , at an estimated cost of $500 million.  World Bank Group funded initial feasibility studies for the pipeline in 1992 and in November 2004 agreed to provide a partial risk guarantee of $50 million through the International Development Association (IDA) and an additional $75 million political risk guarantee from its private insurance arm, the Multilateral Investment Guarantee Agency (MIGA). The US Agency for International Development (USAID) contributed over $1.5 million to assist in the development of fiscal and regulatory regimes and contracts between the host governments and the consortium of private investors, and the Overseas Private Investment Corporation (OPIC) agreed in February 2005 to provide $45 million for additional political risk insurance.

To address these trend and ensure that African insurance companies benefit from the lucrative but delicate business of political risk insurance, Insurers from 45 member countries under the auspices of the African Insurance Organisation (AIO) including Nigeria , South Africa , Europe, the Middle East, Asia and Australia converged in Nairobi , Kenya to explore measures to tackle the challenges of insurring political risk in the continent.

Mr Israel Kamuzora, AIO President encouraged organisations in Africa to purchase political risk insurance given the risk associated with many unstable governments in Africa . Kamuzora said that if well utilized, the political risks coverage would safeguard both domestic and foreign investments in Africa . “Investors will be assured that their businesses will be taken care of in the event something bad happens,” said Kamuzora.

However, Kamuzora advised entrepreneurs that given the high premiums involved with political coverage, they should  pool resources together to spread the cost and still benefit from coverage.

Mr George Otieno of African Reinsurance Corporation confirmed that political and credit risks have not featured much in the African insurance sector because the losses resulting from them are usually too large to be borne.

According to him, “This subject of credit and political risk insurance comes at a time when the continent continues to face the challenges of political risks, which the insurance industry has to address. In the light of the global economic crisis, there is a need to look into credit insurance,”

“Even international insurers have excluded politics from their covers because cumulatively they can result in the collapse of an insurance company. The general feeling is that many African countries are politically unstable. As a result, the chances of occurrence of such risks are high. Since the law of large numbers does not apply in such a cover, businesses seeking such covers have been compelled to pay higher premiums,”.

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$32.5bn. The main sources of loss were in the Business Interruption, Property Damage, and Liability.

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.

In Africa, the 2007 election riots in Kenya; 2007 Algeria bombings; 2008 US Embassy bombings in Kenya; 2009 seizure of Meikles Africa by the Zimbabwean government and November 2007 poverty related riots in Senegal.

In 2008, a local insurer in Kenya introduced such a cover just after the post-election violence. The move came after the insurance industry discovered that there existed a gap in the market where billions of shillings worth of goods were being damaged but could not be covered with existing insurance and reinsurance products.

Mr. Phyllis Mabasaat, Managing Director of South African’s Sasria said research had shown that insurance rates for political risks in the developing world are on average three times higher than in the developed economies. This is partly due to the lack of supply and the often incorrect perception that all African countries have a high risk profile.

Many insurance companies and private individuals have no access to political risk insurance. Even for those companies who manage to place their risks on foreign market, difficulties in communication make business difficult. Slow responses to queries, late renewals, and slow claim settlements are not unheard of.

He said, “Increased availability of political risks insurance in a territory will allow businesses to be more confident about doing business in that territory. This will result in improved economic activity in that territory. This principle applies especially to Africa , which is generally perceived to be a poor political risk”.

“I believe that there is a need for capacity to be created in Africa to carry political risks. This will result in better access to insurance, particularly for those clients who do not have international affiliations”.

In addition to that, Mabasaat stated that there is also the need to build capacity, there is also a need to build expertise in political risks insurance. This may be achieved through investment in the development of local talent and in action aimed at sharing knowledge and experience between different countries.

“Political risks will remain a common feature in emerging democracies especially in the face of economic recession where there is huge disparity between the rich and poor nations.  If Africa pools its political risks it will be able to create internal diversification within the continent”.

Mr. Val Ojumah, Managing Director of First Bank Insurance Brokers did admonished insurance companies in the country to stay clear of risk from the Niger Delta region for obvious reasons`.

No insurance company in the country has the skills and capacity to underwrite such risky businesses and as such, none of them should go into such for now.

“The risks emanating from the Niger-Delta will always be politically motivated. The international insurance market labels it ‘Terrorism or Political Risk’. Whichever way we want to classify it, my advice is that our local players should not go into it at all. There is a special market for it, it is not every insurer that takes this risk”, he warned.

Mr. Wole Oshin, Chairman, Nigeria Insurers Association (NIA) said that Nigerian insurance companies are yet to come up with any meaningful product that can support the financial system other than the more traditional products like the Money insurance and Fidelity Guarantee products. It is important to continuously increase the awareness of insurance across board. Campaigns should go to the grassroots, villages, schools, government.

“Our traditional Property insurance products also needs to be more sophisticated and in line with modern developments in this sector. We must build local capacity. Despite our Capital raising efforts, we seem to retain too little in the Nigerian Market in some cases. This is the only way we will be able to contribute to economic growth”

Oshin noted, “The role of insurance in sustaining and reflecting Global economies is not in doubt. However, in achieving these objectives of playing out traditional role, there is a need for caution. The temptation and pressure for underwriters to write any risk to boost turnover and balance sheet size is high. However, the NIA boss warned on the need to thread with caution.
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