The changing shape of political risks insurance

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The changing shape of political risks insurance
Charles Berry Chairman, BPL Global
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BPL Global Emerging Market Risk

• Insurance broker specialising in Emerging Market
  Risk
• Political Risk Insurance (PRI)
• Trade Credit Insurance
• Terrorism and Political Violence Insurance
• Founded 1983
• Based in London and Paris
• Independent, employee owned
• International client base
• major corporations and financial institutions
• Global Partners
• USA Italy
• Austria Brazil Chile

3
PRI Market Product Overview

• Non-Payment Insurance Special Risks
• Sovereign / Government Buyers / Obligors
• Single Risk / Medium Term Emerging Market Private
  Buyers
• Equity Form PRI Investment Insurance
• Lenders PRI
• Property Based PRI Terrorism, Political Violence
  etc covers

4
Overview

• Period
• ECAs and the Private Market
• Basel II product innovation
• Pricing

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Trade related single obligor risks
Coface EulerH
AIG QBE
Ducroire SJC4
CSL KLN LIB PWH
ACE3 AFB Ark5 Atrium Chubb EIC1 FCIA HCC LIU NVA
Unistrat
Zurich
ONDD2
Atradius
CSL LIB LIMIT PWH TAL
Ark5 Atrium EIC1 FCIA HCC HIS KLN LIU NVA RTH Unis
trat
ACE Chubb Sovereign
AFB SJC4
AIG ONDD2 Zurich
Atradius
Maximum Credit Period (years) 1. 5m net line has
no limitation on credit period 4. No formal
maximum but non-structured credit usually max.
two years 2. No maximum - depends on
goods/project/country 5. Normal maximum five
years but exceptionally seven or even ten 3.
Structured credits - otherwise three years

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ECAs and the Private Market

• The market gap
• ECAs as facilitators, packagers and syndicators
• Co-operation and competition

7
Basel II - Overview

• Basel II will impact trade and commodity finance
  in emerging markets adversely
• Comprehensive non-payment insurance policies can
  qualify as Credit Risk Mitigation (CRM) under
  Basel II

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Background to Basel II

• Regulators catching up with industry practice
• New forms of guarantees
• Unfunded Risk Participations
• Credit Default Swaps
• .a wider range of credit risk mitigants
  (CRM).
• June 2004 Framework para. 110
• Non-payment insurance policies are an acceptable
  guarantee under Basel II, subject to them
  meeting the operational requirements
• FAQ 6, BIS website, Oct.2002

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Basel II CRM 2 key points

• All conditions within direct control of the Bank
• an unconditional guarantee can have conditions
• The bank must control residual risks
• it is imperative that banks employ robust
  procedures and processes to control residual
  risks
• June 2004 Framework, Para. 115 re Overarching
  issues of CRM

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BPL Global Basel II

• Product
• Non-payment insurance policies can meet the
  criteria for Basel II compliant CRM
• Process
• BPL Global helps Bank clients control the
  residual risk
• Proof
• BPL Globals claims statistics show that our
  non-payment insurance works

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BPL Global Claims Experience -Non-Payment
Insurance works!
Failure to pay policies
PRI only / misc policies
Total
Claims from 1983 to May 2007
Problem resolved Full Settlement Compromised De
nied of which - paid after
arbitration - arbitration lost
- denial accepted Pending Totals
55 159 6 3 0 2 15 240
10 24 8 1 0 1 4 48
65 183 14 4 0 3 19 288
Source BPL Global Claims Dept.
E. O.E.
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Non-Payment Insurance - Improvements

• Conditions
• Within direct control of Policyholder
• Removal of traditional exclusions
• E.g 5 Great Powers War Exclusion
• Lloyds March 2007 new regulations
• Shorter Waiting Periods
• Clear claims procedures and timetables

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but it's still insurance

• Principle of Indemnity
• Utmost Good Faith
• Proving a Loss
• vs. Pay first argue later

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PRI Market Final Thoughts

• Non-Payment Insurance Special Risks
• Sovereign / Government Buyers / Obligors
• Single Risk / Medium Term Emerging Market Private
  Buyers
• Equity Form PRI Investment Insurance
• Lenders PRI
• Property Based PRI Terrorism, Political Violence
  etc covers