By CYRIL TUOHY, managing editor of Risk & Insurance®
Scenario: COSTA, Yberra--The Yberran Socialist government of Maj. Gen. Carlos Lopez declared a nationwide state of emergency on Monday, and nationalized all privately-held assets across all industry sectors.
Local owners of private companies were ordered to turn over all assets to government control beginning at the end of the month.
"This will have serious implications for the global supply chain and the distribution of fresh fruit," said Paolo Ortiz, the risk manager for Disfuta Las Frutas (Taste the Fruits Co.), a top citrus exporter.
His company would cooperate with the government edict, Ortiz said.
The government also ordered all senior managers employed by foreign subsidiaries operating in Yberra to report to the Interior Ministry.
Risk managers were told to bring with them details of their existing commercial contracts by the Interior Ministry's Division of Foreign Subsidiaries.
Managers employed by multinationals operating in Yberra who wish to leave the country could do so in the next 30 days, the government said.
"It's a shock to our system, literally," said Peter Smith, enterprise risk manager for Mine Your Own Business Co., which owns six bauxite mines, a fleet of 300 trucks and four huge mining cranes, each valued at about $200 million.
"We're scrambling to review our political risk and contingent business interruption coverage to see if nationalization and expropriation are covered," he said.
Corporate managers, he said, were
"working overtime" to review and assess inventory, distribution warehouses, as well as our mobile assets, cars, trucks and heavy earth-moving equipment.
Mine Your Own Business, which exported about $1.5 billion worth of raw materials from Yberra last year, has no plans to pull up stakes, Smith said.
Political analysts, who had hinted over the past several weeks that the Lopez government was about to announce changes to the nation's private sector, were nevertheless surprised by the scope of the nationalization.
Yberra, a nation of 45 million people with gross national product last year equivalent to $60 billion, exported $100 million worth of oranges, lemons and kiwis. Its mining sector, which is generally considered well-managed, is worth about $300 billion.
"We saw bits and pieces of this coming, but the Lopez regime is reaching far beyond anything we or the global markets expected," said Manuel Vistalarga, a political risk analyst with Consultantes Globales, a Costa-based consulting firm.
"Underwriters are reassessing their rates and their capacity as we speak.
"Global supply chains could take a big hit," Vistalarga also said.
The value of the national currency, the Yberran, plunged and analysts downgraded the stocks of the foreign corporations doing business in Yberra.
Despite the nationalization decree, shops remained open and the economy appeared to operate normally as the capital hummed with the workings of daily life.
Taxis clogged the streets, hotels remained packed with local and foreign tourists, and factories hummed on the outskirts of town.
Analysis: Political risks associated with nationalization and expropriation existed 50 years ago, as it does today. It was, after all, former Egyptian President Gamel Abdel Nasser who nationalized the Suez Canal in 1956.
Over the past few years, pricing for political risk insurance had generally been stable or declining, mirroring broader property/casualty rates, which have dwindled steadily for the past two years. Recent political upheaval in the Middle East are likely to change that.
"If you are a risk manager now in the marketplace looking for coverage in Yemen and Egypt, the appetite would be limited and the cost would be through the roof," said Joe Restoule, former president of the Risk and Insurance Management Society and a consultant to Aegis Insurance Services.
The solution is for the Fortune 1000 companies doing business abroad to transfer the risk before it happens. "There is tons of capacity when everything is good," Restoule said.
It's hard to predict the next flare up, though, as recent events in the oil-rich Middle East attest. Events in the region have moved so quickly in the past two months that not even the most "keyed in" insurance underwriters were able to see it coming.
And when the unrest bubbled to the surface, it hits some countries harder than others. Leadership changes in Tunisia and Egypt were comparatively peaceful.
Libya, a major oil exporter, is a different story as rebels fight to topple the longtime dictator. "In Tripoli, companies had to move things to new warehouses," said Smita Malik, director of commercial insurance with Clements International.
Underlying political revolutionary risk are some undeniable universal economic and demographic truths, political risk insurance experts say.
In the 21st century, the planet sustains more than 6 billion people, up from less than 1.7 billion in 1910.
Many people subsist on less than $1 a day, and while we are more productive and generally freer than many of us were in the past, economic inequalities persist. This is a recipe for unrest, and governments often step in with subsidies.
"The danger comes when the government doesn't always pay the subsidies and the distributors and producers can't pass on the increase," said Matthew Woollam, chief underwriting officer for trade credit and political risk with Liberty International Underwriters in London.
The other factor at the root of political risk are sanctions programs, which prevent companies from trading. "Sanctions programs cause losses for companies because companies can't trade anymore, and this risk is more complex than it used to be," he said.
Sometimes, sanctions are imposed selectively, as the Office of Foreign Assets Control has done on Belarus, Woollam said. OFAC sanctions prohibit transactions with the state oil company. "With Iran, it's easier, because sanctions are much broader," he said.
Risk managers need to look closely at coverage involving trade-related contracts.
"Governments can seize businesses, as the Bolivian government did a few years ago by nationalizing industries deemed vital to the nation's well-being," Woollam said. "Venezuela has a tendency to take over companies and pay compensation, but the amount is often a matter of dispute.
"Instead of outright expropriation, it's more often the case that governments make life more difficult for companies, and that affects the details of the policies buyers have bought to cover themselves," Woollam said.
Capacity for individual policies sold in that market tends to be smaller, and the risk is typically syndicated.
Risk managers also need to look at "investment insurance," which covers property in case of expropriation and political violence and risk of loss, in other words value against political turmoil. Capacity in this market is generally very large.
Global capacity is about $1.2 billion for one risk for one company for a risk lasting three to five years, said Anne Marie Thurber, managing director for Zurich in North America's Credit and Political Risk unit.
"Zurich can write up to $150 million on one risk and we are at the higher end of the private market," she said. "Other markets can write $50 million to $80 million and the Lloyd's market will write smaller lines."
Capacity has gone up slightly since 2009, as other carriers have come into the markets. "Now, we'll have to wait until the numbers come out for 2011 to see what increased volatility does to pricing and capacity," Thurber said.
So, how do risk managers mitigate the threat of political risk if insurance products are simply too expensive when you really need them, even when policies are manuscripted?
Risk managers can set up ventures, in which they lease an asset instead of own it, Restoule said. This would be one of the "tolling" techniques, in which companies pay a fee to manufacturers or producers in exchange for an equity stake of a share of the revenues.
"There's many different forms of tolling arrangements when you don't want to own or operate assets on the ground," Restoule said. "If you look at the risk management process, you are mitigating the impact on the balance sheet."
(Read about our fourth emerging risk, toxic water.)
May 1, 2011
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