In our previous edition we asked PRI claims managers to address questions about the claims process. For the buyer/broker perspective, we sought the opinions of Charles Berry, Chairman of BPL Global, Maura Garych, Senior Vice President, Political Risk Practice, at Marsh, and Paul Aird, Risk Manager, Projects, at Bechtel Corporation.
Q. In your experience, how well does the claims process work, and what accounts for any difficulties encountered?
Charles Berry: You cannot make sensible generalizations about the claims experience of the PRI market without distinguishing among the different product lines that the market sells. Equity and lenders PRI policies are not the main business of the PRI market; most of our business involves covering government (and today, many private, emerging market) obligors against payment default under comprehensive non-payment policies. My firm has settled over 150 claims of this type for our clients and the PRI market’s record on this type of claim has been very good. Most of these claims were paid in full. They were not always paid on time, but there is work being undertaken to improve the timeliness of payment for this type of payment default claim.
However, our claims experience has been less satisfactory when it comes to Equity and Lenders PRI Forms. Having said that, our two largest paid claims, each over USD 70 million, were both Equity PRI claims. Equity Forms, and their many versions, generally perform well in circumstances where there has been an outright taking. However (until recently, anyway), such outright takings have been rare in the last 25 years. Conversely, claims involving regulatory takings or breach of contract can be more difficult to settle.
Turning to the Lenders PRI Policy, my belief is that the key to a better claims experience in this area is a more realistic view among policyholders of what the policy does and does not cover. First of all, Lenders Forms cover currency inconvertibility risk well. Here the making of a local currency deposit by the obligor clearly delineates the line between commercial risk and political risk. The problem is that this mechanism of dealing with a foreign currency crisis is out of fashion with host governments.
In other circumstances where an obligor defaults on a payment, it is very often difficult to untangle the political and commercial causes. Where this is the case, policies that cover defaults caused by political perils, but not commercial perils, are going to be difficult to work.
Finally, it would be wrong these days not to also talk about the experience in the market of political violence claims. The experience in this area has been limited, but good so far, despite wording issues on many terrorism policies that still need fixing.
Q. What factors other than the type of claim determine how well the process works?
Maura Garych: In my experience, the size and type of a claim will impact how “easy” an underwriter may be to work with to reach a conclusion. The less objective the cause of loss and the larger the size, the more difficult the process will be. I would rate a Political Violence loss to be the most objective, followed by Currency Inconvertibility, and the least objective are the “Expropriation” type losses. A large, Expropriation type loss will be the most difficult case. Further, if a loss scenario has impacted numerous buyers and insurance policies, the underwriting community will be cautious about setting a precedent with the first claims determination.
From a broker’s perspective, the best case scenario is an Insurer who engages both its claim staff and its underwriting staff in the process and looks at a claim as an opportunity to prove the worth of its product. The most difficult Insurer is one with a claims staff lacking in knowledge about the product and other case history, or that begins immediately framing all conversations with concern about admitting any liability under the insurance contract.
Finally, in some instances, the claims process may depend on the overall relationship between the buyer and the Insurer. As in many relationships, open forthcoming communication over time does tend to facilitate the process but less ideal relationships prior to a claim will not likely “help” the claims process.
My experience with claims has highlighted the subjectivity of political risk wordings and the potential for numerous interpretations of language. Language thought to be understood in the market may however be taken quite literally in the analysis of a claim.
Q. Is the claims process notably different when you are dealing with a public as opposed to a private sector insurer?
Berry: Yes. I say this as I am a firm believer that every claim in the private market is first and foremost a commercial matter that needs a commercial strategy. Likewise, with a government insurer, a claim will take place in a political context for the agency.
Garych: My comments as they relate to the type and size of the claim and how this impacts the claim process apply whether the insurer is private or a public agency. That said, because the public agencies are transparent in their communication of claims submitted and the decisions made, my expectation is that the process is more objective, i.e. collect the facts and weigh the issues to reach a determination. The facts are interpreted knowing they will be subject to public scrutiny.
Q. In a PRI claims situation, do any special problems arise when the insurance is syndicated? If so, how readily are they managed?
Berry: Where a risk is syndicated, there is a greater logistical and administration burden. In the London market, at least, this burden is considerably eased by the established processes and the conventions requiring smaller participants to delegate claims authority.
Commercially, though, there are advantages to syndication. Obviously, if the claim is small and routine it may well be easier to deal with one underwriter. However, if faced with a claim for USD 100 million, we would far prefer to have syndicated that risk around the market. It’s easier to collect USD 10 million from 10 insurers than USD 100 million from one, however well that one is reinsured.
Garych: Recovery issues should be addressed in the claims cooperation agreement. We are still surprised to find contracts we inherit without completed claims cooperation agreements addressing recoveries, subrogation and communication. Even with a claims cooperation agreement, syndicated placements increase the complexity because, generally, each underwriter has the right to act only for their own account and therefore all information must be communicated to each Insurer separately (with the exception of Lloyds). In fact, the term “Claims Cooperation Agreement” is a misnomer because it addresses cooperation with respect to recoveries, not the handling or determination of a claim.
Q. How good are political risk insurers at helping to avoid or minimize a loss, and what role should they play in that process?
Paul Aird: I think public agency insurers have lots of potential but, ironically, for their own political reasons they can’t always use the resources they have to avoid or minimize a loss. As an example, if you have a loss developing in Country X but the US government is trying to develop better ties with that country to help fight the war on terror, then US government agencies may be hindered in their ability to negotiate with the country over your claim.
Berry: I think the record of the public agencies in avoiding PRI losses is mixed. I am sure that MIGA and OPIC have rightly claimed successes in this area. However, where the political stakes are high, it seems to me that even the government insurers do not have much clout.
The private market also claims some successes, for example in Argentina, where certain insurers’ membership of the Berne Union enabled some transfer losses to be mitigated. This is to be applauded. However, for expropriation and related host government problems, I do not believe that, generally speaking, private insurers bring much to the table, particularly for their larger, more sophisticated clients.
I therefore believe we need to maintain a clear delineation of who is responsible for trying to avoid and minimize the loss at different stages of the claims process. My belief is that this delineation should follow the principle that if the insurers do not know enough about the specifics of the situation in order to accept liability under the policy, then they cannot know enough about the situation to control the risk mitigation and loss avoidance negotiations. Therefore, until liability is accepted, I believe the main responsibility for avoiding or minimizing the loss should remain with the policyholder. This does not preclude the policyholder from seeking the insurer’s assistance, if they wish.
Of course, the insurers should still be fully advised and consulted in that process. I fully recognize that the policyholder has a clear duty and interest here, and that the insurers may well have something to contribute.
Garych: We should all be working on the same basis but there seem to be some issues with underwriters’ concerns that assisting with risk mitigation may be an admission of liability under the policy. There are documented circumstances where an Insurer has successfully avoided or mitigated a loss (MIGA takes particular pride here). However, there are also cases where an insured simply replies, “act as if uninsured,” and it leaves the client in a grey area.
Q. What suggestions do you have for making the PRI claims process work better?
Garych: First, advocate increased transparency and more detailed claims information to be released publicly. If the market had a body of knowledge regarding past claims, Insureds could be educated on the information required to more quickly interpret a claim. Buyers would be educated better up front as to what to expect the policy will cover and will not cover. If underwriters cannot provide specific claims, it would be helpful to have redacted claims histories again to illustrate how the policy works. It would be helpful for Insurers to provide a basic outline of the information they need to see for each type of claim.
Second, expect the policy will be interpreted literally at the time of a claim. Pay close attention to the wording of conditions, warranties and exclusions. Third, consider the potential evolution of a deteriorating situation and err on the side of over-reporting to the Insurer because a marginal situation may in hindsight turn out to be a pivotal point in the “Cause of Loss.” Make sure that communication will flow to the parties responsible for reporting under the policy.
Aird: In general there need to be more incentives imposed on the insurers to settle claims more quickly, such as saying they have to pay interest from the date of the loss (and at a rate that is somewhat punitive), and perhaps to pay reasonable costs incurred by the insured to settle a claim. Under the current system, I just don’t see much incentive for insurers to actively engage to settle a complicated claim. For a big claim, just the savings on time value of money alone is enough to pay legal fees to drag things out. Also, it would be helpful if there were more information available about claims that have been settled as well as those that were denied, and information about how long it took to settle.
My guess is that if you presented the same hypothetical claim to insurers and insureds, a lot of insurers (and their lawyers) would explain why the loss is not covered, while the insureds would generally think that the hypothetical claim is covered. Of course, lawyers would probably argue that nobody should comment about hypothetical loss scenarios which, in my mind, is wrong as it just delays the dispute until there is a real claim. So something should be done to try and get this on the table earlier. If you are going to have a useful product, then there should be a meeting of the minds up front about how certain hypothetical claims would be settled along with, perhaps, general information about actual claims that were approved as well as those that were denied.
Berry: My advice to buyers of PRI who do not have much experience in claims matters is to use a broker who does. My advice to brokers in our field who do not have much claims experience is not to advertise that to their clients! ■