Despite the rising tide of political and economic turmoil in the world, the cost of buying political risk coverage and trade credit insurance is declining even as demand is sharply increasing.
“The pricing has become much more competitive,” said New York-based Lila Rymer, head of U.S. underwriting for political risks and trade credit at Beazley. “A lot of new entrants and more capacity in the market has driven this competition.
“So it’s a very good time for clients to consider buying political risk and trade credit insurance because the terms are quite favorable,” Rymer said.
New York-based Stuart Barrowcliff, senior underwriter, political risk for XL Catlin, added that capacity is growing because it is a way for insurers to diversify and expand offerings beyond P&C “where there’s obviously lots and lots and lots of capacity and tremendous pressure on premium.”
A report by Marsh noted that political risk insurance capacity has steadily increased over the past decade, particularly since the financial crisis. In some cases, market capacity for a single policy now exceeds $2 billion, nearly double the available capacity just six years ago, the report said.
Likewise, the increase in trade credit insurance in that period has grown considerably, driven by — among other things — E&S insurers entering the market, as well as banks, other financial institutions and Lloyd’s syndicates making major inroads in this market.
“You also see some of the private equity companies, hedge funds and others who are looking at putting together funding vehicles to invest in trade finance assets and they can come to the trade credit insurance markets to sit behind them,” said Jeff Abrahamson, Baltimore-based global head of supplier trade credit for XL Catlin.
In years past, companies and financial institutions might typically buy stand-alone political risk coverage, said Owings, Md.-based James Daly, president and CEO of Euler Hermes Americas.
“But the trend today is to purchase comprehensive coverage, which includes protection against both trade credit losses and political risks,” Daly said.
“Traditional trade credit insurance adds another layer of comfort, protecting against bad debt losses when a customer simply does not pay its bills.”
Political risk insurance protects foreign assets held by multinational corporations, financial institutions, investors and project contractors against the risks of confiscation, expropriation, contract frustration and nationalization, Daly said.
“In addition to providing protection for trade transactions, it may also cover production facilities, equipment, offices, refineries and other fixed assets and equity investments,” Daly said.
Political risk circumstances usually include war, terrorism, riots and actions by local governments, such as changes in export or import regulations that affect the outcome of a transaction.
“Traditional trade credit insurance adds another layer of comfort, protecting against bad debt losses when a customer simply does not pay its bills.” — James Daly, president and CEO, Euler Hermes Americas
Fredrik Murer, New York-based head of Americas, political and credit, for Chubb, noted that political risk and trade credit insurance offer balance sheet protection in an uncertain world.
“Tremendous volatility entered world markets when the commodity super cycle burst,” said Murer.
“The rapid drop in oil prices created upheaval in country and corporate balance sheets alike, creating both political and credit risks in the process.
“Foreign exchange fluctuations add to the stress on U.S. dollar payment obligations. What started as an economic risk may quickly become a political or credit risk as countries act to protect their local interests.”
Corporations and banks are the major buyers of trade credit insurance.
“Banks might buy an annual trade credit policy that we have the option of renewing,” said Beazley’s Rymer.
“When a company is selling goods to a buyer, for example a Brazilian buyer, a bank might purchase the receivables from the supplier. If the supplier is due to get paid in 60 days, the supplier might say, ‘I want to be paid tomorrow.’
“By selling the receivables to a bank, the bank can cash out the supplier up-front and then the buyer owes the money to the bank.”
Rymer added that when banks invest in bigger projects in emerging markets, say a mine or an oil field, they are likely to seek political risk coverage or more comprehensive credit insurance on the investment they’re making.
XL Catlin’s Abrahamson said that other clients are non-bank financial institutions that are providing working capital for corporate clients.
“Banks are using trade credit insurance as a real driver on the trade risk receivables side,” he said.
“A lot of banks will finance receivables for their customers and procure insurance on that financing. This can help them more efficiently utilize their capital.”
For corporations, maintaining trade credit insurance and often political risk coverage along with it has become an increasingly important way to expand their business.
“It’s not just about mitigating risk, but very often trade credit insurance helps companies grow their business, so they can increase their lines of credit and expand the business they are already doing,” said Rymer.
“It might help a company access financing through their lending bank. By having trade credit insurance on their buyers they’ll be able to get bigger lines of credit from their lending partners.”
Or if a company is internally very comfortable with a certain limit to a buyer where they see an opportunity to grow, they can credit insure those receivables, which may enable them to extend a bigger line of credit to that buyer and grow overall sales, she said.
Chubb’s Murer noted that political risk coverage and trade credit insurance provide a company with more certainty.
“With this insurance, if the unexpected happens you know there’s a level of protection against an outcome that can be catastrophic to your continued operations,” he said.
“A company can invest and grow its sales base with more certainty and lenders can benefit as they support the continued expansion of their corporate customers.”
Added Gregg Badger, COO for international food merchant Ronald A. Chisholm Limited, “If we did not have trade credit insurance and political risk coverage we would be hard-pressed to do any borrowing against our non-North American receivables.”
Badger said that 60 percent to 80 percent of Chisholm’s business is outside of North America and the company needs that working capital to keep it operating and growing. Chisholm actively does business with hundreds of companies in 50 to 60 countries, he said.
When the company’s salespeople are out looking for new customers and trying to open up new markets, one of the first steps they take is to see whether the customer they’re calling on is creditworthy, i.e., insurable or whether it’s on open credit or on secured terms, Badger said.
Managing the risk of accounts receivable, customers and processes allows the company to assure its banking syndicate that the receivables are insured, he said.
Panama Papers Reveal Hidden Art Assets
A Panamanian law firm that created offshore tax havens for a host of well-known world leaders, entertainment celebrities and wealthy individuals has its tentacles deeply rooted in the international art market, according to the International Consortium of Investigative Journalists’ inspection of 11 million documents leaked from that law firm, Mossack Fonseca.
Locked in the so-called “Panama Papers” files, in addition to revelations of $2 billion held in a tax haven by a cellist and long-time friend of Vladimir Putin, evidence of tax-haven profiteering by Britain’s Prime Minister David Cameron and incriminating information about the tax-haven holdings of soccer superstar Lionel Messi, there are answers to mysteries involving Rembrandts, van Goghs, Matisses, Chagalls, Modiglianis and other masterpieces, according to the Australian Financial Review.
The “Panama Papers,” reported the ICIJ, also shed light on the real story behind Christie’s milestone 1997 Ganz collection auction, which is credited with starting the art market’s wild enthusiasm for modern art.
These and other art-related disclosures in the Mossack Fonseca treasure trove of documents have raised important art insurance issues.
“The ‘Panama Papers’ have brought to light an unprecedented public, moral hazard that will no doubt increase governmental scrutiny on art ownership and title.” — Robert Read, head of art and private clients, Hiscox London Market
First and foremost is the matter of art title insurance.
Lawrence M. Shindell, New York-based chairman of ARIS Title Insurance Corp., a wholly owned subsidiary of Argo Group, said, “The ‘Panama Papers’ highlight the growing need for transparency in the international art industry. The less the transparency, the greater the title risks with high value, highly mobile art and collectibles.”
Across the many kinds of title risks associated with art and high-value collectibles, whether or not a property insurer has paid insurance proceeds covering the physical loss, clear legal title goes to the core of asset value, which is what enables an artwork to be freely marketable, Shindell noted.
“Hiding away a work of art only compounds the title problems, increases the reality as well as the perception of title risk in an increasingly risk-averse world and impacts object value,” Shindell said.
Diane Jackson, Washington, D.C.- based COO and head of day-by-day operations for Huntington T. Block art insurance brokerage, noted, “In the case of disputed art revealed by documents leaked from Mossack Fonseca and possibly other tax-haven creators, the holders of the art may be asked to provide proof of clear title because the law firm set up the account offshore strictly for hiding purposes.”
If it is determined that art has been hidden in an offshore account, but then the art comes to light publicly, this may well result in a lawsuit being filed by somebody who claims rightful ownership, Jackson added.
“This is typically what happens when heirs will do research to determine if the art belongs to them,” Jackson said. “If they can provide proof that the art was wrongly taken from their family, as in the case of some contested Nazi art, they could dispute the ownership of the art in question. The individuals who have been hiding the art would then need to show how and when they acquired it.
“If a resolution is not reached between the two parties, then the courts would determine who the true owner is,” observed Jackson.
As for storage possibilities for art registered in offshore tax havens, Robert Read, head of art and private clients at Hiscox London Market, said, “Depending on the circumstances of ownership, there are a number of likely storage options for artworks owned by clients the likes of Mossack Fonseca. If the circumstances relate to tax planning, it is likely artworks will be held in a Freeport or under an alternative ownership structure, though it is feasible that such works would be on display in private homes.”
Whether artwork is held in one of the growing number of art warehouses around the world or kept in an owner’s home, property insurance for this art may be provided by law firms like Mossack Fonseca or it may be taken out from an insurance company by the holder of the artwork, Read noted.
If a work of art that has been stolen at some point suddenly comes to light as a part of Mossack Fonseca revelations or by some other means, Chicago-based Scott Hodes, senior counsel at Bryan Cave LLP, said this presents yet another kind of major art insurance-related matter.
“A collector needs to ensure that missing or lost artwork is listed in the records of the Art Loss Register as soon as possible and that the FBI is notified when the loss or disappearance occurred,” said Hodes. “These actions will help establish the collector’s timely claim.”
Hodes added that the collector needs to review the art insurance policy in force at the time of the loss and focus on the definition of “loss” in the insurance policy.
“A financial loss may not be covered,” said Hodes. “But if a theft or mysterious disappearance of the artwork is covered, was the insurance company notified when the loss occurred or was discovered? If so, then the insurance company should be contacted immediately if the policy provides that the insurance company is required to represent the collector in any effort to recover the artwork.”
The collector should check to determine if the policy allows reimbursement of legal fees and costs or provides that the insurer must represent the collector, Hodes said.
“Potentially, this could be a big money saver for the collector,” Hodes noted.
Lastly, Hodes said, the collector may need to act quickly through his or her counsel to file a lawsuit in the proper venue to sequester the artwork and enjoin any sale or disposition of the artwork until a court has ruled on lawful ownership.
Looking to the future, Hiscox’s Robert Read observed, “The ‘Panama Papers’ have brought to light an unprecedented public, moral hazard that will no doubt increase governmental scrutiny on art ownership and title, but this alone will not be sufficient to force behavioral change among owners. The only way this will affect the art market is if governments enact laws which render current ownership arrangements illegal.”
Finally, Read noted, “The art market typically follows the lead of other established asset classes, so as long as the storage of art in international Freeports behind complex ownership structures continues to be legal, it will likely remain in practice for the purposes of both tax planning and privacy.”
Heavy Metal in the Water
Thanks to nationwide media coverage of the “orange river” acid mine drainage (AMD) spillage at the abandoned Gold King Mine in Silverton, Colo., the health of the nation’s waterway system attracted much more attention in the past year.
But, in fact, according to the federal Environmental Protection Agency, AMD is the greatest danger to the waterway environment in the United States on an ongoing basis.
“Acid mine drainage is a huge problem,” said Sharon, Pa.-based Rod Taylor, managing director with Aon’s environmental group.
“It’s not just a matter of current mining operations, which now have come under environmental regulations with respect to wastewater discharges, but drainage from abandoned mines that were explored, developed and worked out over the last 125 years in this country with little regard to environmental impact.”
There are hundreds of thousands of abandoned mines in the United States, located primarily in 12 Western states and Alaska where gold, silver, copper, zinc and other precious minerals were mined.
In addition, coal was and is extensively mined in the East, Midwest and the South presenting similar problems, experts said.
“AMD is a problem in streams, rivers and lakes where mineral deposits and mining are prevalent,” Taylor said. It is caused when water flows over or through sulfur-bearing materials, forming solutions of environmentally harmful acidity.
“The parties that are responsible in today’s environmental regulatory world would obviously be the mine operators,” he said.
“The Department of Interior’s estimate of the cost for cleaning up the estimated 500,000 abandoned mine sites in the U.S. range from $32 billion to $72 billion.” — Rod Taylor, managing director, Aon’s environmental group
But while the mine owners are required to post evidence of financial responsibility for mine closure and post-closure care, the amounts required have proven to be inadequate, Taylor said.
“Operators and owners of abandoned mines often are no longer in business,” he added.
“Some that are still around are not financially capable of responding to the problem. This leaves the cleanups and closure for tens of thousands of abandoned mines to taxpayers and government agencies.”
To focus on the daunting problem in the U.S. — in addition to state agencies — the federal government has four agencies devoted to dealing with AMD: the EPA, the Department of Interior’s Bureau of Land Management, the Interior Department’s Office of Surface Mining Reclamation and Enforcement, and the Department of Agriculture’s Forest Service.
Collectively, these agencies spent $2.6 billion from 1997 through 2008 on hardrock mine reclamation, Taylor said.
By itself, the resources that the EPA has to devote to the AMD problem are grossly inadequate for what the task will cost, Taylor said.
“The Department of Interior’s estimate of the cost for cleaning up the estimated 500,000 abandoned mine sites in the U.S. range from $32 billion to $72 billion,” he said.
“If the EPA’s spending rate of $221 million a year was maintained, the abandoned mines could take 325 years to clean up.”
Taylor noted that insurance for AMD might be available for people who are impacted downstream.
“So if you were operating a marina and if there was a chance for a release of AMD from a mine upstream you could purchase environmental insurance as the owner of a site that was affected by AMD,” he said.
“Or you could purchase insurance that could cover you in the event operations were impacted,” Taylor added. “Or if you’re a water delivery system, you might consider insurance if that system had its source in rivers where AMD existed.”
Overall, said Jim Vetter, a Salt Lake City-based managing director with Marsh’s environmental practice, getting gradual pollution coverage for mines is difficult because of the risk perceived by the markets for the industry class as a whole.
“That said,” noted Vetter, “there are some markets that have appetite for mining risks and could cover off-site pollution conditions such as cleanup and third-party bodily injury and property damage claims migrating from a property, depending upon the site-specific details.”
AMD leaks from mines that are inactive, so federal and state agencies bear the burden of addressing it, said Vetter. “But there are a lot of instances where there are current owners that are highly responsible and involved in trying to address the waste drainage.
“In those cases, those operators are incurring significant costs around water treatment. They may be operating wastewater treatment systems. They may be using more passive systems where they’re putting in limestone aggregate to increase the pH of the water,” he said.
Taking the Financial Risk
Also, there are specific companies called environmental buy-out firms that actually have appetite to assume the cleanup risk and water treatment obligation from a company.
“So suddenly you have somebody who is operating a water treatment system that is either installed or has to be constructed,” said Vetter.
“These companies come in and say, ‘We’ll put a value on what it will cost to do the cleanup or operate the water treatment and then we will take that liability from you in cash.’”
“So if you don’t have an owner and there’s no current insured on whom to make a claim, sometimes you can reach back and make a claim on prior insureds under long-past insurance policies if they are still available.” — David Rieser, an attorney with K&L Gates in Chicago.
“These buy-out firms are taking on the risk around financial performance,” Vetter said.
From a risk management perspective, the issue surrounding AMDs in the U.S. is more about who is legally responsible, said Vetter. “You’ve got what is called joint and several liability. Joint and several liability essentially means that once you are in the chain of liability, you can be brought back into the risk again in whole or in part.”
David L. Rieser, of counsel at K&L Gates LLP in Chicago who covers environmental law, said he doubted that commercial general liability policies “would cover releases from mines because of the absolute pollution exclusion. This excludes coverage for claims resulting from releases of contaminants or pollutants.”
There may be coverage under pre-1980s policies that did not have these exclusions, Rieser added.
“There may also be coverage under specialized pollution liability policies which are now available.
“And a lot of these occurred from mines that have long been abandoned,” Rieser said.
“So if you don’t have an owner and there’s no current insured on whom to make a claim, sometimes you can reach back and make a claim on prior insureds under long-past insurance policies if they are still available.”
When it comes to risk management and AMD, “you’re talking about the physical reality of controlling these releases from uncertain or unknown conditions,” Rieser said.
“Sometimes releases occur as a result of geological events where an older mine will suddenly be releasing drainage into a nearby waterway as a result of an earthquake or minor kind of tremor, depending on the geology in the area.
“Under current mining regulations there are any number of different ways people can manage the programs that watch for potential releases and make sure the waste materials stay in the right place,” Rieser said. &