You specialize in syndicating placements. What are the benefits of PRI syndication?

I am a great fan of the syndicated market, partly because I believe the PRI market has to accept the inevitability of real losses, ones that won’t necessarily be recoverable over time, like war risks and terrorism risks. Therefore it is important to adhere to the core principle that insurance spreads losses so they “fall lightly on the many rather than heavily on the few.”

Syndication is clearly good for the client as it delivers the capability of the whole market, rather than the single capability of one underwriter. And syndication also benefits insurers as it enables them to operate within their comfort level and better balance their portfolios. This is why even smaller transactions are often syndicated.

Is it harder to negotiate coverage with multiple insurers than with one?

We are so used to the practice when dealing with London, Europe, Bermuda, and the broader international markets, that we do not really see any major difficulties. One of the reasons that syndication works smoothly is because it is broker-led. This is not only true for the London based PRI placements but applies generally in the insurance market for large and complex risks. For example, when we recently syndicated a large risk, seven insurers wrote it on identical terms and conditions, but none of them at any stage talked to each other. This is not only efficient, it is good for the client. It means the client, through their agent the broker, controls the syndication process.

In the North American PRI market it has been more common for syndications to be led by the leading insurer. Personally, I always feel uncomfortable with the idea that insurers who are meant to be competing sit down together and talk about the same transaction. For larger risks there clearly needs to be an element of cooperation between insurers, but that co-operation is more efficient and more healthy if it is coordinated through the broker.

But the syndication process can be and is being improved: we are making better use of technology; there has been increased standardization of the format of placement slips; the relationship between different insurers on the same placement is being codified, rather than being simply based on market practice; and there is a big initiative to improve contract certainty. All this does not change the principle though: syndication is an excellent way of spreading risk.

Some traditional PRI covers – CEN and CI – seem to be in diminished favor with buyers these days. What are the mains reasons and what does the market have to do to regain buyer confidence?

The main problem with currency inconvertibility (CI) cover is that the world has largely moved to floating exchange rates. CI cover was designed for a fixed exchange rate environment. Currency inconvertibility coverage was never designed to deal with devaluation risk. I do not believe the insurance market will ever produce an effective solution for this. Devaluation is a price risk, and we do not do price risk. When lending to emerging markets in hard currency you need to address devaluation risk first. When that is dealt with, then lenders PRI policies can still provide a lot of value, and CI cover is an essential part of that cover.

Classic confiscation, expropriation and nationalization (CEN) coverage has been out of fashion. However you would be wrong to forget about it: look at South America. Chavez in Venezuela, Morales in Bolivia, and Humala in Peru are all feeding off a nationalistic and leftist reaction against the West and against globalization.

If history is anything to go by, the reaction to globalization can be more powerful than globalization itself. Elsewhere in the world radical Islamists are feeding off the same reaction. The Bush doctrine, globalization, even development: like it or not, they are not popular with everyone. So the full range of political risk is out there, including classic expropriation.

I believe global businesses generally sense the risk, but the insurance demand is currently more for terrorism and political violence (PV) cover. PRI insurers should focus on meeting and channeling that demand, particularly because only PRI insurers can provide a proper solution to terrorism and PV risks in emerging markets.

What are the biggest opportunities and challenges facing the PRI market today?

I have to distinguish here between the traditional investment insurance products (by which I mean policies covering specified political risk perils such as CEN, Currency Inconvertibility, Political Violence and War risks, whether for equity, loans or tangible assets) and comprehensive “failure to pay” insurance policies. Of course a great deal of the activity of the private PRI insurers is in this area of Non-Payment Insurance.

For these Non-Payment Insurance Policies, the future looks pretty good, because even though the number of government-owned obligors is diminishing, the product is being applied beyond strictly trade-related transactions, and, for example to local currency loans to government obligors. Additionally of course, many of the so-called PRI insurers underwrite single situation and medium term comprehensive Non-Payment Insurance on private sector obligors in emerging markets, further eroding the line between the PRI market and traditional export credit insurance.

I believe that Non-Payment Insurance is a great product whose market will expand, particularly with banks for their emerging market exposures, driven by the pressures of Basel II which will require high regulatory capital allocations for emerging market exposure. In this regard I am quite satisfied that Non-Payment Insurance from the private insurers suitably amended can be and will be recognized as qualifying Credit Risk Mitigation under Basel II, thereby allowing the banks to gain regulatory capital relief.

Unfortunately I do not believe the investment insurers will get the same boost from Basel II. And the traditional investment insurance market is somewhat in the doldrums. To some extent the slack has been taken up by covers for Breach of Contract, Denial of Justice, and so on. While these areas are important, the PRI market should not just be about the good faith and good credit of the current host government. At root, the PRI market should be there for unexpected, and often violent political change. Historically (if not recently) it has been war, revolution and conflict that have produced most political risk losses—including most CEN losses.

The risk of an attempted revolution somewhere in the world is quite high at the moment. While nearly all governments have signed up for the “war on terror,” for many this has a political cost at home. This is why leaders like Musharraf in Pakistan and even Mubarak in Egypt needed the Danish cartoons, like they needed a hole in the head. I think it is a pity that many investment insurers haven’t responded quicker to the demand for specialist and stand-along terrorism and political violence coverages following 9/11. The initial reaction was to leave even the emerging market risks to the terrorism insurance market which, strangely, has become a separate silo in the insurance industry.

What has been the growth of the terrorism insurance market and why do you see it as an opportunity for the traditional investment insurers?

Since 9/11 the stand-alone terrorism insurance market has grown from a premium base of about USD30million per annum to an annual premium income in round terms of USD500million. This is a testimony to how responsive some insurers can be – particularly the London underwriters who led this market immediately after 9/11. But having said that, the terrorism market has not got it right for emerging market risks.

The opportunity for the PRI insurers lies in the product sold by the terrorism insurance market. The terrorism T3 wording and its variants was designed for the US or Western Europe. The T3 wording only gives “Lightweight Terrorism” insurance. In the context of emerging markets it covers some form of terrorism but excludes others. Terrorism in emerging markets has many faces. Some terrorists are also insurgents, rebels or guerrillas. So if you think the T3 wording covers all the types of terrorism found in places like Iraq, the Niger Delta, Sri Lanka, Colombia and elsewhere in emerging markets – dream on. The legal advice we have taken on the T3 wording supports this. In the context of emerging market terrorism, T3 is, in their words, a “dog’s breakfast.”

Effective insurance cover for emerging market terrorism can only be found in a PRI product. If you make the necessary amendments to the T3 wording to make it suitable for emerging market risks, the cover can only be provided by PRI insurers.

Happily, many terrorism insurers are also PRI insurers, particularly in London and Bermuda. As and when the demand in respect of emerging market risks changes and buyers start asking for a better product, these insurers will simply take their terrorism underwriting hat off and put on their PRI hat. Meanwhile, PRI insurers who previously did not write stand-alone terrorism and political violence covers are beginning to do so, focusing of course on emerging markets.

So the supply is there. How rapidly things change now depends on how quickly policyholders take a closer look at the risk and the wordings. At the moment 95% plus of emerging market stand-alone terrorism insurance is still being purchased on the basis of an inadequate T3 based “Lightweight Terrorism” wording.

But won’t better wider terrorism coverage using the PRI approach be more expensive?

No—not necessarily. We have seen significant premium savings achieved by moving a terrorism insurance renewal from the terrorism market to the PRI market. For these renewals, the PRI alternative was better and cheaper. There is no consistent pattern, however. It depends on the risk, and to get the best from the current market you need to be able to work seamlessly in both the terrorism insurance and PRI markets.

This is because—for emerging market risks—there is a convergence underway between the terrorist insurance market and the PRI market. It is really quite ridiculous that our market has been dealing with emerging market terrorism insurance and political risk insurance in separate “silos.” It may suit the insurers, but in reality they are clearly part and parcel of the same risk. We are breaking down this silo mentality – and it means much better value for the policyholders.


Charles Berry is Chairman of BPL Global, a founding member of the global network of independent political risk and trade credit insurance brokers. He co-founded Berry, Palmer & Lyle in 1983. With over thirty years as a London-based political risk broker, he is widely recognized as a pioneer and innovator in the fields of political risk and trade credit insurance.