Over the last two decades the political risk insurance marketplace has experienced remarkable growth and has demonstrated an ability to respond ably to evolving buyer needs. In recent years, however, PRI claims experience has yielded outcomes that have disappointed both policyholders and underwriters.
Most PRI transactions are confidential, so there tends to be little appreciation among buyers regarding PRI payouts but a much greater awareness of claims denials, because news or rumors about claims denied tend to seep out. Although underwriters are starting to report claims payments statistically or in cryptic accounts, the impression that the PRI claims process isn’t working very well lingers in the marketplace.
Underwriters have had bad experiences too. In fact, insurers can lose even when they win because every “win” in a hotly contested claim may mean the loss of a client and damage to the insurer’s reputation in the buyer community.
Better communication at the outset might help to avoid some of the problems. PRI coverages have often failed to respond to events of loss that buyers say they thought their policies were going to cover. In some cases, buyers simply didn’t understand what they were getting. Brokers and other intermediaries might give even greater attention to assisting buyers to understand the meanings and limitations of their policies. But if policies are fraught with pitfalls and ambiguities to begin with, better communication alone won’t help much and may not even be possible.
Certainly buyers need to be aware of policy exclusions and limitations that bar compensation for a loss that otherwise meets the loss definition. Underwriters are under pressure to revisit some of these boundaries. Even so, a more fundamental problem remains.
The challenge: making policies say what they mean
PRI policies depend on abstract notions and wordings that ultimately have to be applied to unruly facts and unknowable future developments. It is important that these policies mean what they say, but it is not always easy for underwriters to say what they mean. Clever wordsmithing can never make the problems go away completely, but surely underwriters can do better. We are going to suggest a few things that might be done. Two have to do with policy wordings, and another with the whole way we think about political risk coverage.
The uses of manuscripting
Manuscripting a PRI policy lets policyholders and insurers tailor coverage to fit a specific project and its particular risk profile. Policy language can be crafted or sharpened to address particular concerns. For this to work for policyholders, they or their specialist advisers need to have a sound understanding of the relevant sector and its risk vulnerabilities—a particular necessity for infrastructure projects.
Nonetheless, there are perils in the manuscripting process. A wording problem that keeps cropping up is often the result of what is commonly called “heavily negotiated” coverage. Unfortunately, what sometimes results from these negotiations is a clause or a paragraph that fits poorly with the rest of the policy, confronting the parties with contradictions or confusing policy terms that may have to be settled by arbitrators, who in the presence of ambiguity or uncertainty are empowered to cut themselves adrift from the policy and go sailing off into uncharted waters of “intent” and “reasonable expectations.” The results will probably outrage and astonish one of the parties, most likely the insurer. A simple solution is to stay the rush to closure long enough to have the entire policy read by a professional who has not been immersed in the negotiations and comes to it with a fresh eye.
Boilerplate problems too
In any case, curing problems in standard policy wordings should not be left to the manuscripting process any more than basic manufacturing flaws should be left to the repairman to deal with. It is important to have good boilerplate wordings from the start. In a business as conservative (in its own way) as PRI is, wordings tend to be regarded as sacrosanct when they are merely familiar, and gaining acceptance for alternative language meets formidable obstacles. Coming up with new wordings whose meaning is clear and unequivocal is no small challenge. Still, it does not follow that those wordings should stay as they are if their meaning proves elusive or highly debatable when it comes to applying them in claims situations.
Let us give an example. Many policies require that to be expropriatory, a government’s act must “expressly and permanently” deprive the insured of its interests. “Permanently” suggests that the mere passage of time provided for in the “waiting period” isn’t enough, but what is? Surely there is some finite limit at which an unresolved expropriation should become “permanent” for purposes of the coverage.
A greater problem is presented by “expressly.” What does that mean? Does it mean that the government must formally announce that it is taking your property and has no intention of paying you for it? That may happen, but most governments nowadays are more subtle, and policyholders probably do not expect to have to meet such a high standard. But if the standard is lower, what is it? Is it just that the taking not be inadvertent?
“This is the way we have always done it”
It is becoming increasingly difficult to fob off investors and lenders with assertions that standard wordings have meanings that are well understood in the marketplace (if so, would there be so many disputes?), or that “this is the way we have always done it.”
Two other objections to new standard wordings are commonly raised. One is that broad language benefits the policyholder because too much precision may force a narrower interpretation of coverage than would otherwise apply. Maybe, but how often do we hear of an insurer stretching the meaning of a PRI policy to yield coverage in a threshold situation?
The other objection is that instead of better language, you will just get more of it, with those pesky (American) lawyers piling word upon word without really improving anything, a view commonly encountered in the United Kingdom. But in the hands of seasoned and knowledgeable professionals, improvements are possible without monumental growth of the policy form. Underwriters and buyers alike have an interest in exploring them.
Yet another possibility
An alternative to the tough task of developing better wordings and getting them accepted by the interested parties might be to borrow from the derivatives market approach, and to let proxy events and indicia (alongside an actual loss) be the triggering basis for PRI compensation. Our firm came very close to achieving this in negotiating a political violence policy whose payout depended on a severe depression of a project’s revenues, concurrent with general industry downturns connected to certain political violence occurrences, in the absence of statistically determinable exogenous factors. The effort was eventually abandoned because of external commercial events, but not because the prospect of such coverage was remote. The benefit of this approach, of course, is that if the loss is ascertainable and the other factors independently verifiable, you have less room, if any at all, for debating whether the loss is covered. And that would be a very good thing.
Political risk insurers offer important and needed support for investment. The experience of PRI underwriters overall has been very good, and many claims have been paid. But too often the claims process doesn’t yield the results that one of the parties expected. The underlying problem frequently lies in wordings that are ambiguous or that fail to clearly state what the parties intended. Absolute clarity is an elusive goal, but there is ample room for policies to state more clearly what they mean. ■