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Medium Term Credit

&

Political Risk Insurance Market:

« This Product works ! »

16th June 2016

Automobile Club de France 6-8 Place de la Concorde, Paris 8

PRI CONFERENCE 16 JUNE 2016 ‐ PARIS 1

BROKER FOR CREDIT INSURANCE AND REINSURANCE

Investment and project financing

The investor has little influence on local policy settings, but there are solutions to transfer such risks.

Solmondo finds insurance covers at a very competitive rate to secure your investments.

Bonds to be issued

Export contracts on equipment or construction work require guarantees to be issued. Solmondo uses Insurers to find the best solution: more secured and cheaper.

Export contracts

To secure contracts with public or private buyers, To secure related credits. Solmondo supports exporters with tailored insurance policies.

Crisis management

Kidnap, ransom and extortion are real dangers for companies operating both overseas and in domestic markets. Solmondo sets up the most comprehensive proposal.

Proactivity, Reactivity, Creativity and Perseverance: Since 1999, Solmondo has gained the trust of many exporters, investors and banks.

2 PRI CONFERENCE 16 JUNE 2016 ‐ PARIS


PARTICIPANT’S FILE

1. Schedule of the conference

2. Speakers

3. Opening Address

4. Solmondo: Insurance broker specialized in political risks since 1999

5. The founder: France ARNAUD DE TADDEO

6. New: Solmondo PRI School in Paris (opening in September 2016)

7. Presentation of the Market (Mark GUBBINS)

8. Capacities of the credit and political risk market (Gallagher statistics)

9. Claim process: the role of the Broker

10. Information about Claims paid by Insurers

11. Market’s new trends in 2016 (France ARNAUD)

12. Managing African Credit and Political Risk (Nicholas KILHAMS)

13. Claims, defaults and obligations: comparing private Insurers and ECAs (F. ARNAUD for TXF Paris 2015)

14. Blending ECAs and private insurance solutions (F. ARNAUD for TXF Paris 2015)

15. Presentation to Global Heads at « Fédération Bancaire Française »: Comment mieux tirer parti des capacités abondantes d’assurance privée pour dynamiser le financement des exportations ? (June 2015)

16. Participants

17. Concluding Topics & Proposals

18. Solmondo Press Articles



MEDIUM TERM CREDIT & POLITICAL RISK INSURANCE MARKET:

« THIS PRODUCT WORKS ! »

Schedule of the conference

14.20 CIAN Welcome by Etienne GIROS

Foreword by France ARNAUD 14.30 Presentation of the market by Mark GUBBINS, A.J. Gallagher 14.50 Insurers’ point of view by Alex HILL, Beazley Claims manager 15.00 Claims paid by the market over 20 years: Process and recent evolution

Tim BRADFORD: Loss adjuster, Leadenhall Adjusting 15.45 Tea break 16.00 Market’s new trends by France ARNAUD, Solmondo 16.15 Managing African Credit and Political Risk

Nicholas KILHAMS, Chaucer and David EVANS, A.J. Gallagher 16.45 Concluding Topics & Proposals to be discussed Closing Cocktail


SPEAKERS

Mark GUBBINS – Managing Director, Credit and Political Risks

Arthur J. Gallagher

Mark is responsible for the AJG Credit and Political Risks Insurance practice of some thirty people with representation in New York, Singapore, Sydney, Perth and Dubai. Mark joined AJG in April 2010 from FirstCity where he jointly ran the Trade and Political Risks

Insurance practice and also served as a board director.

Having spent nearly 35 years trading as a Political Risks Insurance broker he has had wide experience of all aspects of the class of business (both trade and project related) and is now considered a market leader in Credit and Political Risks Insurance for cross‐border project developments and project financing with particular experience of the resources sector (oil & gas and mining).

Alex HILL – Claims Manager

Beazley

Alex trained as a solicitor at the College Of Law, London, before moving to work in the Insurance Practice Group of a major Philadelphia Law firm. On return to England Alex spent 11 years managing trade credit and political risk insurance at AIG before moving to Beazley in February 2014. Alex currently manages the Credit and Political risk Claims team in

London’.

Tim BRADFORD ‐ CEO

Leadenhall Adjusting Limited

Leadenhall Adjusting Limited is the only dedicated credit and political adjusting firm in the world. Working for ECAs, the private market and Miga. We are globally based and we can respond where ever is required, with offices in the UK, USA, France and Australia. We are working in all of the current hotspots. This includes Ukraine, Libya, Yemen and industry sectors including metals, petrochemical and manufacturing. Over thirty years’ experience, which has included claims in Africa, Asia, USA, Europe.

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OPENING ADDRESS by France ARNAUD

In 2016, we are in a situation where investors, exporters and banks can use either national ECAs or so called “Private insurers” to cover their risks.

Purpose of the Products seems to be relatively the same BUT there are important differences due to their respective nature as one is PUBLIC, the other PRIVATE: ECAs provide cover with the State’s commitment, and therefore have to deal with specific CONSTRAINTS:

• Evidence of the national interest: requires full information to be given to the administration on sub‐contractors and suppliers and on price / cost breakdown to prove the national content and excludes any construction work abroad

• OECD rules to define « fair » premium on credit, not being « too supportive » for the national Exporter

• ECAs like to make their activity « public » to the Buyer’s country or investor’s country government

• Relying on taxpayers’ commitment, clauses of the policies cannot be too flexible

• Necessary time to follow administrative procedure: as a whole, a normal process will last several months due to the administrative process

Private insurers, accessed by specialized brokers:

• Decide only on a Risk analysis, country/obligor capacity and commercial perspective,

• Confidentiality is common practice: NDAs can be signed and insurers might accept not to see certain information that is too critical to insured’s competitors

• Business oriented: very flexible on the structures, accepting for example to cover direct payments where the ECAs might require a LC

• Very flexible on prices, especially when we can explain that it is required • Very flexible if policy clauses must be amended to fit the risk • Very quick: indication of pricing is almost immediate and an order to bind can

be placed the same day if such urgency is needed

Private market offers a great opportunity to improve competitiveness.

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TEACHING: 1994‐2012 ‐ University Paris‐Dauphine « Financial decision of the firm in developing countries ». September 1993 – September 1998: Agence Française de Développement Promotion of private investments in Africa: support for the creation of national guarantee funds (South Africa, Madagascar, Chad, Tunisia...) and creation of guarantee funds for the financing of private investments (GARI‐ fund still active in West Africa, ARIA…). Management of the information system for AFD, regulated financial institution.

1988 – 1993: Côte d’Ivoire, promotion of African SMEs ‐ Creation and management of a private capital‐risk company, Fidi Sa, with 7 company shareholders (SIR, SODECI, SITAB, SG, Total, UAP, UNILEVER) and 8 individuals – still active. ‐ Creation and animation of an association « Sponsorship & Partnership » to facilitate technology transfers for small entrepreneurs; founding members: Abidjan’s great performers (BNP, Bolloré, Bouygues, Nestlé, SIR, SG, Shell, Total, UAP, Unilever, UTA). September 1983 – 1988: Agence Française de Développement Full diagnosis on Utilities in Burundi, Cameroon, Ivory Coast, Haiti, Mauritius, Nigeria, Senegal, Madagascar… (water, power, telecommunications, rural development). 1982 –1983: Bruges, College of Europe – Economics department followed by an internship at the EEC in Brussels 1978 –1982: Cabinet Guérard in Abidjan, Paris and New York PUBLICATIONS Epargne sans frontières : “Fonds de garantie pour l’Afrique : utilité et impact” Le Moci 2000 – 2001 & Marchés Tropicaux – 2001: various articles about political risk covers Echanges (DFCG) – 2008: “To issue guarantees, don’t choose between bankers and insurers!” Le Moci 2010: “A real political risk market in Paris” Le Moci 2011: “New capacities on the Parisian insurance market” Finance & Gestion (DFCG) – 2015: “Export surety bonds: the increasing appetite of bond‐insurers”


SOLMONDO PRI School

Opening in September 2016

Training program: 2016 – 2017

Contracts & Financing • How to estimate the Contract interruption’s risk to cover • Payment instruments for Export • Financing: Buyer’s Credit • Supplier’s Credit • Combining Private and Public capacities • Contract terms to negotiate and Solmondo’s advice • Broker’s key role during discussions with banks • Follow‐up of the execution • Claims process & diligences • Recovery diligences

Issuing Bonds & Guarantees • Bonds facility to set up • The Geography of Guarantees • Where does the pricing come from? • How to improve the quality of the texts?

Investments • Investments’ protection with a multi‐countries insurance policy • Definition of the limits • Securing Financing of the investments

Crisis management • Kidnap & Ransom: a daily attitude • How to draft a Crisis management procedure?

Solmondo opens a place dedicated to training and workshops:

21 rue du Cherche‐Midi, 75006 Paris Information : [email protected] – 33 1 45 44 83 80

www.solmondo.net


Presentation of the Market

Mark GUBBINS

A.J.Gallagher in London








CAPACITIES OF THE

CREDIT AND POLITICAL RISK

INSURANCE MARKET

Half yearly Statistics

Collected and presented

by Arthur J GALLAGHER (London)








PRI COONFERENCCE 16 JUN

E 2016 ‐ PPARIS 2

9


INFORMATION about CLAIMS paid by INSURERS

AIG

Since the inception of AIG Political Risk Business (1974), AIG has received 319 claims and paid $509M with respect to these claims. Arbitration or litigation was required to resolve disputes in 24 cases. They have achieved recoveries of paid claims from third parties of $258M. A portion of recoveries is reimbursed to insured clients to compensate them for their participation (through deductibles and self‐insured retention) in the original loss.

ASPEN

Aspen has never had a valid claim they didn’t pay on time and in full.

ATRADIUS

Atradius loss ratio after recovery over the past 10 years is below 40% on average, with high volatility across the period.

CHUBB

Chubb has paid out claims in excess of $250M for non‐payment (STC and PRI) for the past 10 years, prior to any recoveries coming in post payment of the claim. They have paid out or in reserve $434M since 2005. This amounts to 101 cases: PRI (Political Risk Insurance) $54M, Short‐Term Credit (STC) $260M, Trade Credit (TC) $120M.

EULER HERMES

Euler Hermes France paid a claim in Africa, and currently manages few difficult claim notifications in Africa, Middle East, East Europe, and Asia.

LIBERTY –131 claims paid over the past 15 years on Credit & Political risks –188 M USD of claims paid –Claims paid for risks located in 54 different countries


SWISS RE

Swiss Re have a worldwide, established primary insurance (and reinsurance) portfolio of Non‐Payment Insurance with different insured events.

Based on the portfolio, Swiss Re had claims in different regions (e.g. Africa, Middle East, Central and South America) and different amounts. Some of the claims has been settled in full or partially (e.g. in case of 2 or 3rd layer and successful recovery actions), in some of the claims they have paid only cost of the lost adjuster or legal fees. They can confirm that there are no claims which were not considered valid or went to arbitration in this portfolio.

ZURICH

Overview 1997‐2015: 751 000 000 USD Credit & Political Risk Claims paid.

Visit: zurichna.com/creditandpoliticalrisk



























PARTICIPANTS


AIRAULT Pascal L'OPINION ALAMOWITCH Stephan UGGC

AMICO Pietro DANIELI ARNAUD Pierre LAWRENCE IMMO

AUTEROCHE Helene EUROTRADIA BEAUPERE Yves SECAMIC

BETBEZE Thierry DASSAULT AVIATION BIVAS Raisy EULER HERMES

BOCKLER Christian LLOYD WERFT BOURIC Delphine VEOLIA BRUGERE Valérie NOKIA BRUMTER Thierry COGNOWIN

BULDHOO Olwyn MUFG CANTON Patrick BOUYGUES CARON Nathalie ROXEL

CHANUT Jean‐Pierre MBDA CONIO Michael GARANT CORNU Yves VINCI CUJBA Emilia VEOLIA

DE TAISNE Xavier BOMBARDIER DECAM Stephen CIAN DECROIX Estelle VEOLIA DELCOURT Jonathan THALES

DEVE Catherine MBDA EISENSTEIN Thierry BOUYGUES CONSTRUCTION

ERMANS Michel SAHAM FAGELSON Judith TXF

FAYSSE Dimitri ZURICH FESTA Patrick INVIVO FILLARD Dominique MBDA FIROZALY Razid AXA FLOGNY Aude AFD FROSSARD Pierre‐Elie MBDA

GARY Sébastien VEOLIA GAUTHIER Germain VINCI GERRESCH Vincent BESIX GIROS Etienne CIAN

GODIVEAU Valérie THALES GOMBEAUD Jean‐François AIRBUS

GOROG Nuria ZURICH GRIVORY Jean‐Pierre COFINLUXE

GROSSET Sylvain NATIXIS GUY Maxime ATRADIUS

KANKE Masaru NEXI


KLIEBER Bruno SADE KOCUREK Andreas DAIMLER

KOEGLER Elisabeth PRIMETALS TECHNOLOGIES KURODA Saki NEXI

LACOURTE Francis NATIXIS LATOURETTE Hugues BPI France LECOINTRE Mathilde BEAZLEY LEFEVRE Brigitte MBDA LIGUTI Dario GE LUCAS Jean‐Pierre CODEPRIME

LUCEREAU Bertrand SECAMIC LOZE Antoine NEXTER

MAAROUF Aissa TRACTAFRIC / OPTORG MACAIRE‐FREYNET Carole NATIXIS

MAINGUY Fabien SUEZ MAKHIJA Ashish STANDARD CHARTERED

MARZULLO Francesco ENEL MOREAU Guillaume SIEMENS MOREL Fabrice SOLMONDO Allemagne

NAMVONG Mylène SOCIETE GENERALE OECHSLIN Olivier COFACE ORRECCHIA Yoann SOCIETE GENERALE PARADIS Fréderic MARCK

PARALUPPI Francesco MAIRE TECNIMONT PENENT Aude AFD PICHON Emmanuelle EUROTRADIA

RAGONE Vincenzo ANSALDO RAYMOND Raoul MIZUHO BANK

RENAUDEAU D'ARC Anne‐Laure LIBERTY RIVET DE SABATIER Christian GIMAR & CIE

RIVIERE Xavier NECOTRANS ROUMILHAC Arnaud BANK ABC

SORIEUL Sandrine CIAN SHINGU Hirohisa NEXI STREEFKERK Christophe SAHAM THAI Anh UNICREDIT ULKER Dominique AIRBUS VAN ROBAIS Baudoin GE VINCENT Charles DASSAULT AVIATION WELCH Henrik Guldbaek VESTAS

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National Financing Scheme / PRI 1/ Most european countries already use PRI :

Use of private garantees by public Financing entities

UK – EKF Sweden – SEK Germany ‐ KFW, …

In France, we expect to be able to do so very soon☺

2/ More Information about PRI (not only on Eca)by public entities / Professional associations

3/ Improved bank regulation :Fair recognition of private insurers signature !

PRI CONFERENCE 16 JUNE 2016 ‐ Concluding Topics 3

And …for Europeanmulti‐countries groups: a unique European ECA !

PRI CONFERENCE 16 JUNE 2016 ‐ Concluding Topics 4

Before that,

let’s join Solmondo team for the cocktail !

THANK YOU FOR YOUR INTEREST



PRESS

- FINANCE & GESTION, June 2015

The increasing appetite of bond Insurers

- Le MOCI, 31 March 2011 Export Insurance: New capacities on the Parisian market

- Le MOCI, 15 April 2010

Paris, a significant market for private medium term export credit insurance

- ECHANGES, January 2008 Issuing contract bonds for the export market :

Between bankers and insurers: don’t choose!

- Le MOCI, 31 mai 2001

Protecting investments: 10 questions, 10 answers from specialized broker

- Marchés Tropicaux, 14 mai 2004

The political risks insurances on investments

- Le MOCI, 13-20 juillet 2000 Not getting covered for political risk is a management fault


Most export contracts require contract bonds (performance bond, advance payment bond…) whose amount might be substantial. By using both banks and insurers’ capacities, exporters can optimize capacities, costs and legal safety thanks to the increasing appetite of bonds’ insurers.

Depending on the country, contract bonds may reach 10%, 20%, or more than 40% of the amount of the contract when it has been well negotiated with significant advance payments, and even up to 100% in countries where bonds include extensive guarantees, as in the United States or in some Latin American countries (Colombia, Panama, for example).

As the costs for bonds issuance are not supposed to be a significant cost item, some companies tend not to devote the necessary time to develop an optimization strategy between bankers and insurers. A market of about 12 insurers can be mobilized depending on the beneficiary’s country.

However, bonds are a necessity which may challenge the entry into force of the contract if they have to be issued a few days after signature. The recent involvement of insurers in the contract bonds market for export contracts offers a real market where the broker has the opportunity to diversify the issuing sources, thus providing access to various geographic areas – especially the American continent ‐ increasing capacities and reducing rates.

Globalization for Export Bonds

The issuance of bonds for the export market is an area which has not yet been affected by globalization. The International Chamber of Commerce (ICC) standardization efforts have focused on the bonds texts, but their use is subordinated to local laws, which creates a diversity that is detrimental to exporters.

There has been no harmonization on the type of issuer between bankers and insurers; the buyer (beneficiary of contract bonds) must take into account the regulations before deciding whether to accept or to reject the Guarantee offered by the seller.

Each continent has its own specificity.

Concerning the issuance of contract bonds, practices differ from one area of the world to another and local laws add to this diversity.

June 2015

EXPORT SURETY BONDS

The increasing appetite of bond insurers


On the American continent, insurers are the “benchmark” issuers. In North America (United States, Canada), bonds requested by public buyers are only issued by insurers and their commitment is an obligation to fulfil the contract (rather than an obligation to pay a limited amount): insurance companies hence pledge on amounts equivalent to the original value of the contract because, in case of failure, they are bound to finish the work employing another professional. Accordingly, the regulated quotation of the issued bonds depends on the technical degree of the concerned work.

These specialized companies, called Sureties, thereby have a special relationship with their client, often exclusive, carrying out regular diligences on their activity and its resulting financial position.

In Latin America (Panama, Mexico, Colombia, Equator, Venezuela…), insurers are also the reference issuers of bonds in a legal framework often highly regulated. For example, in Colombia, public buyers require a guarantee which includes multiple aspects (performance, advance repayment but also civil liability) and for which the amount can reach 100% of the contract value.

To export to the American continent (North and South a specialized bond broker will manage to issue the required bonds with maximum legal comfort and minimal costs.

In the Middle East and North Africa, the tradition is with Bank bonds: this implied to structure insurers’ capacities behind an issuing bank. However, some countries are beginning to grant the first licenses to insurers in the UAE, Qatar and Saudi Arabia.

In Europe, an open legal framework. The use of bonds insurers for domestic needs has been well known for several decades in most countries (Germany, Belgium, Spain, France, Netherlands, Italy…). Some insurers have even developed a system to print the domestic bonds in the contractor’s offices

– thus reducing paperwork.

However, export contracts usually mention "bank guarantees”, which implies that the exporter will use a bank to issue those bonds. Actually insurers have long been reluctant to intervene in the export market, especially to issue first demand Guarantees.

In Europe, the legal framework allows to use banks as well as insurers to issue any legal guarantee, even for export contracts and with efficient rate conditions.

In Asia, many countries (China, Korea, Hong‐Kong, Singapore …) allow the use of insurers as issuers either by direct issuance from Europe (France, Germany, the UK …) or by local issuance.

The risk of bonds’ calling

International guarantees are “payment orders” destined to secure the use of the “Buyers’ funds” as well as the right execution of their project. International guarantees may be subject to threats of calling that are often intended to "reopen negotiations." Those payment orders are more or less easy to call: this is where the difference between “first demand guarantees” and “conditional bonds” is important.

Certain callings can be insured on the political risk market, composed of more than 50 insurers in Paris, London and Singapore consulted from Paris by specialized brokers. In the case of a public buyer, any calling is covered (except for proven technical litigation). With a private buyer, the coverage protects against all political events preventing the proper execution of the contract: embargo, withdrawal of licenses, war, political violence... and thus inducing the call.


Exporters’ strategies: the use of a specialized broker

With a market of about 12 bonds‐insurers and increasing capacities, a company should solicit a specialized broker in order to have access to capacities from insurers. That way it is ready to export to different continents and can safely access worldwide markets, even the most exotic ones.

The specialized broker can share with his client his experience on local practices and acceptable texts in a given country. He creates market competition between up to 12 insurers, coordinates capacities and contributes to the improvement of legal comfort, the increase of available capacities and the reduction of the bonds’ cost.

For political risk, he consults more than 50 insurers to identify the one that will best protect issued bonds from unjustified calling or simply political calling.

For a balanced collaboration between banks and insurance companies

For the exporter, the use of insurers can reduce the number of banks required on a project, which simplifies the distribution of cash flows and other products (LC confirmation).

These overall capacities from banks and insurers for the issuance of bonds can thus be combined by the Bond Broker according to the Beneficiary’s geographic area.

That way, both costs and legal certainty can be optimized.

The relationship between bankers and insurers is more of a mutually beneficial collaboration than a competition. Even if banks supervisory regulations are not entirely neutral, "Basel III" is a significant step forward because it trivializes the use of 'non banker' partners in their solvency ratios. On the other hand, some medium size banks can still be bothered by the monitoring ratio for large exposures. Some banks, depending on their own financial characteristics, can still be deterred to organise an operation with insurers rather than with other banks, but they actually get some operational advantages out of it, since they are no longer asked to share other banking products.

For the banker, having an insurer as partner provides capacity when he needs it. He does not ask for counterparts regarding flows management or sharing banking products – such as payment instruments confirmation. Certain bankers have understood the leverage effect that they can get from working with bond brokers.

Paris has become a vanguard marketplace for insurers’ export bonds

It is possible to mobilize 2 billion euros from insurers for a single operation and on a good signature, when we could only reach 150 to 200 million 10 years ago. If the use of insurers is not a panacea with regard to banks capacities, it nevertheless increases the overall capacity for the exporter. This enables him to avoid tense situations after a new contract has been signed, allows him to access the high potential markets of the Americas and reduces his legal risk, while exerting a gentle downward pressure on issuance costs.

France ARNAUD DE TADDEO, Solmondo

1

PRI CONFERENCE 16 JUNE 2016 ‐ PARIS

Export Insurance: New capacities on the Parisian market

Update after our 2010 article

Expert analysis and views from France ARNAUD, founder and head of the independent broker SOL MONDO.

2011 started with an explosion of popular movements in different countries, incidents which could disturb foreign economic interests. These current events justify growing interest for insurance possibilities offered to French companies. Expert point of view follows:

These incidents can disturb foreign economic interests in different ways: in affecting the sequence of commercial contracts in process or the functioning of investments realized in the country, leading to damage of the goods or a stand-still in their production.

It is necessary to have a quick reminder of the notion of political risk from the insurer’s point of view. What are the facts leading to a claim: political events, social movements followed by physical insecurity, dysfunction of administration, ports and airports… As many facts that have or could have occurred during political tensions in Tunisia, Egypt, Ivory Coast, as well as in Libya, Bahrain, Yemen, Oman, Morocco, or Saudi Arabia…

A new government can offer to renegotiate contracts signed by his predecessor to obtain technical or financial arrangements or even to reconsider them radically because public strategy has changed: this is the “Fait du Prince”! Political risk can also happen on the exporter’s side, if his mother country recommends to repatriate his citizens or even forbids deliveries into a troubled country.

In Libya, the violence of the repression has led the United Nations to adopt sanctions, repeated and hardened by the European Ministry Council. The embargo decided on all equipment likely to be used for internal repression has frozen the execution of all current contracts. It is the same as for sanctions decided by the European Union against some companies in Ivory Coast.

The importance of contractual clauses

For these contracts, the main question now is: Of what quality are the contractual clauses?

When political risk appears, the exporter re-reads the contract signed with the buyer and suddenly realizes the importance of the quality of the wording of contractual clauses: how is the “force majeure “clause written? Is it possible to suspend work easily without penalties? In front of which tribunals to enforce rights in the first place, and if troubled times continue, will it be possible to ask for compensation for the loss incurred and receive the appropriate compensation for this loss?


Are bonds conditional or at first demand, « autonomous » from the contract. If yes, are they protected by a sentence detailing, for example, that they can’t be called in case of “force majeure”?

In front of these risks, a private insurance market offers adjustable covers, according to the contracts, the market has doubled between 2007 and 2011.

From 600 million to 1 billion euros available per operation

A specialized market with increasing capacity

As opposed to the banking system and to the short term credit insurance, the market of medium term covers has stayed very active even though the 2008 crisis, with the rising of new capacities and opportunities between 2009 and 2010, even on very difficult countries.

This market of political risk is a mature market, born more than thirty years ago following the needs of major multinational corporates (investors and exporters) wanting to cover significant financial risk. It is a worldwide market with subscription centers in Paris, London, Singapore, Australia, the United States and Geneva where the brokers can access as soon as competition and syndication are justified.

The technical specificity and the importance of unitary amounts of risk on this market justify indeed the intervention of specialized brokers who operate following very secured rules and procedures at each step of the process of instruction, placement-binding and follow up. Most insurers on this market refuse to interfere without the assistance of a specialized broker to the client.

Available capacities in Paris: one third of the world market.

Our Moci press release in April 2010 already described very high market capacities. Since then, these have been reinforced by the arrival or three new significant actors: Euler Hermes and Liberty Mutual in Paris and Starr Insurance in London. They bring another capacity of 150 million euros per operation. The French Market now represents one third of world capacities with nine subscription offices.

Here are the capacities:

-On a private buyer, the theoretical global capacity per operation is evaluated to about 600 million euros on risks up to a 7 year term.

- On a public buyer, the theoretical global capacity per operation is evaluated to more than one billion euros on incurred risk for the insurance of contracts, which answers the needs of contracts of much higher nominal amount.

All insurers on this market can engage themselves for 5, 7, 9 or even 15 years if the context of the operation justifies so.

The products: securing of the contracts and protecting the investments.

The market allows to insure investments against confiscation, expropriation, destruction during riots, civil troubles or terrorist attacks.

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PRI CONFERENCE 16 JUNE 2016 ‐ PARIS

Contracts

For the contracts, covers concern financial risk before and after delivery -these are called manufacturing risk and non-payment risk-as well as protection of bonds issued in profit of the buyer.

Before delivery, when it is a special manufacturing, engaged expenses are insured above received payments. Risk appears when political events or the insolvency of the debtor prevent the good functioning of the contract and lead to a premature interruption. This risk exists each time the contract describes the sale of specific products which cannot be sold as they are, to another buyer.

If the buyer is a private project company created « ad hoc »for an operation (non free/paying public service infrastructure), it is particularly important to insure the interruption of contract risk, because, even if the contract stipulates the right for compensation of engaged expenses above received payments, in case of contract interruption, by definition, the company of this project while work is in progress is not solvent.

After delivery, the market insures payments through simple transfers (if the buyer is well known) or through letters of credit (or non-honoring of payment Guarantees). If payments are made through a letter of credit, insurers can:

- Guaranty payments up to 90 or 95%. If all conditions for the payment of the letter of credit are brought together, and if the issuing bank is not paying, the exporter can receive compensation for the insured part of the letter of credit. This is what happened in Kazakhstan and in Ukraine when local banks failed.

- Insure the « non-certification » by the buyer. This means to compensate the exporter on his

manufacturing risk, which are engaged expenses above received payments when the buyer abusively retains necessary documents and signatures for the payment.

Indeed, letters of credit anticipate often the presentation of various and large number of documents, any material mistake can lead to non-payment. For these cases of « abusive non - certification », insurers offer to complete the non-payment warranty of the letter of credit through a mechanism of compensation of engaged expenses above received down payments. This loss is designated as a «manufacturing risk».

Bonds, when they are at first demand, can be called if the exporter is not fulfilling its contractual obligations, even if he is stopped by a case of force majeure (political violence, withdrawal of export licenses, embargo …). When bonds are insured, the exporter may be

compensated of the amount of the bond called as soon as the leading fact is political, independent from the exporters will.

France ARNAUD, Broker

N° 1864 – 15 April 2010

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Paris, a significant market for private medium term export credit insurance

Expert analysis and views from France ARNAUD, founder and head of the independent broker SOL MONDO.

Insuring investments against international risk, the protection of export contracts and the financing of raw material together form a “political risk” insurance market. Insurance companies now also deal with credit risk on private buyers over medium term durations (up to 7 years). Claims paid in 2009 (Ukraine, Kazakhstan, Bahrain, Brazil, Venezuela, Ghana ...) have not undermined market capacity, which has actually increased in 2010.

1 Private supply

-For companies, the products on offer include insurance for foreign investments (against seizure, political upheaval and terrorism) over periods of up to 15 years, insurance against financial risks on export contracts over the medium term (up to 15 years when the buyer is the public sector) and insurance against manufacturing risks, credit risks and the protection of bonds.

-For banks, the insurance products on offer are decided on a case by case basis or are part of a framework agreement which determines in advance the conditions by which risk is shared. They guarantee loans to buyers over the medium term (5-15 years depending on the country), letters of credit (the premium being calculated as a percentage of the commission charged by the bank), the financing of raw materials and many other forms of tailored finance.

2 – The size and capacity of the market

The market is made up of 12 companies and 20 syndicates at Lloyds. Capacity has increased every year since 2008, and even since the beginning of 2010 (for example Axis, CV Starr, Aspen, HCC, QBE): the total market capacity available in 2010 per insured risk has increased by 70% compared to 2007.

In terms of insurance for investments, the available market capacity for one off transactions to cover risk is over one billion euros (of which one third is over 15 years and half over 10 years).

The market capacity available to cover financial risks associated with public sector contracts has also risen to one billion euros, of which 345 million is over 15 years.

For private sector contracts, the market capacity available to cover financial risks is more than 500 million euros, of which two thirds is over 7 years.

For a transaction (contract or investment), the market can cover risk up to one billion euros.


3 - The emergence of the Paris market

The market has historically been based in London, centred around Lloyd's. There was only one insurer in Paris - Unistrat, set up in 1987 by several French insurance companies as part of Paris pool, and then gradually acquired by Coface.

Over the last ten years, French exporters and banks have regularly looked to London to transfer some of their risk in export financing and major projects (bank loans or letters of credit), to the point that they now make up around a third of the London market.

The vitality of the French market in using this specialized private insurer has encouraged some market players to open underwriting offices in Paris, especially since French insurance companies have not entered this space: for example, Atradius in 2005, Zurich in 2006 and several specialized syndicates of Lloyds of London (Beazley, Hiscox, Kiln). These facilities have remained quiet in that the market operates through specialized brokers who are brought in directly when needed.

There are now 6 of these insurers in Paris, compared to only Unistrat in 2003 – this shows that the dynamism of this market is still underestimated. The Paris market alone can today mobilize one third of the total capacity of the market on investments (300 million euros), one third of the capacity of the market on contracts (300 million euros), and 40% of capacity of the global market on private risk (at over 200 million euros per risk).

The Paris market represents one third of the underwriting capacity of the global market 4 A near

perfect coverage

The geographical coverage of the private market is almost perfect: no country is ever completely blocked from the market because the underwriting expertise of these companies allows them to operate even in unstable countries, or countries which have proved to be “bad payers”. In effect the insurance companies first of all evaluate the investor or exporter, and then choose whether they want to do business with them.

Through this approach, the private market has always been able to cover risks which are not acceptable to public insurers (buyer credit in Romania in 2000, investments in the Ivory Coast even in the crisis of 1999-2000, in 2009, to countries more or less closed to public insurers: Madagascar , Ecuador, Pakistan ... DRC, Ecuador, Nicaragua, Guinea-Bissau, Zimbabwe ...)

The market works for exporters of all nationalities. Its development is hampered to a degree in some countries where discriminatory taxation is applied only to the private market, in comparison to untaxed public insurance – for example in Switzerland, Germany and Italy.

5 The role of the State

The role of the State is well defined by both European regulations and the OECD framework intended to ensure fair competition and that state aid does not cause distortions in the market.

N° 1864 – 15 April 2010

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The principle of subsidiarity means that the State only intervenes where the private market fails.

This is especially important when the fiscal position means any state intervention requires careful consideration. In this context, it is important to ensure that State interventions are well judged and only considered where the private market cannot provide a solution – applying the principle of subsidiarity means making sure the State does not take on risk which could actually be carried by the market.

Different countries have different approaches to putting the principle of subsidiarity into practice. In the United States, the OPIC questionnaire explicitly refers to this principle, and requires the insured to prove that the private market has been unable to meet his needs.

The Netherlands do not pay brokers for their work on transactions insured by the State, which guarantees they will do their utmost to find solutions in the private market before resorting to the State. This approach could be proposed to the Berne Union and put in practice in all member countries.

Using brokers as a mechanism to guarantee subsidiarity could be proposed to all public insurers in the Berne Union.

Maintaining the role of public insurers is important: they have a role to play!

In Practice, the State should for example be seized for more that 15 years contract or when the amount of the risk is over the market capacities Furthermore, the minimum premiums charged by the private market make these products inaccessible for small to medium enterprises. This is where public insurers, without the requirements of profitability, has a role to play. The return for taxpayers from this kind of use of public insurance products is that the State can impose conditions to its assistance, most importantly to protect industry and therefore jobs. Changes in national policies on credit insurance may therefore arise from knowledge of the products available on the market, so that assistance from public insurers can be better tailored to the needs of business.

Conclusion The various emergency measures taken by different European governments following the banking crisis in August 2008 have resulted to a “slash prices “ of public products, essentially from a desire to protect banks by allowing them to transfer risk to the State, rather than private insurers. In most cases, the elasticity of the private market has helped to protect their business, but it seems that the European Union, conscious of the existence of the private market and the threat to this market from excessive state activity, wishes to scale back as quickly as possible (by the end of 2010 at the latest) this exceptional level of state intervention.

France ARNAUD, Broker


Major export contracts require contract bonds (performance bond, advance payment bond…) which amounts represent a substantial investment. Therefore a strategy should be developed in order to diversify their sources of issuance.

ISSUING CONTRACT BONDS FOR THE EXPORT MARKET

Between bankers and insurers: don’t choose!

By France Arnaud, Sol Mondo,

Broker Specialized in international insurances.

Depending on the country, contract bonds may reach up to 10, 20, or even more than 40% of the amount of the contract, when it has been well negotiated with significant advance payments, and even up to 100% in countries where bonds include extensive guarantees, as in the United States or in some Latin American countries (Colombia for example).

As the costs for bonds issuance are not a significant cost item, some companies tend not to devote the necessary time to develop a strategy to cope with issuers.

However, bonds are a necessity, which may challenge the entry into force of the agreement when the contractual deadlines for their issuance are very short

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(sometimes only a few days). Hence, it is important to anticipate these requirements, in order to impede a single or many banks to raise their rates at a key issuing period.

The recent involvement of insurers regarding contract bonds market for export offers a good opportunity to diversify the issuing sources, thus providing access to various geographic areas – especially the American continent ‐ ensuring capacities and reducing rates.

A field still little affected by globalization.

The issuance of bonds for the export market is an area which has not yet been affected by globalization. The International Chamber of Commerce (ICC) works for standardization have focused on the bonds texts, but their use is often subordinated to local laws, which lessens their interest and maintains a diversity detrimental to exporters.

Nevertheless, there has been no harmonization on the selection of the type of issuer between bankers and insurers; the buyer (recipient of contract bonds) must take into account the regulations before deciding whether to accept or to reject the surety proposed by the seller.

Each continent has its own specificity.

Concerning the issuance of contract bonds, practices differ from one area of the world to another. Furthermore, interferences of local laws add to this diversity.

On the American continent, insurers are the benchmark issuers.

In North America (United States, Canada), bonds on public demand are only issued by insurers and the commitments taken are obligations to fulfil the contract (rather than an obligation to pay): insurance companies hence pledge on amounts equivalent to the original value of the contract because, in case of


failure, they are forced to finish the work employing another professional. Accordingly, the regulated rates of the issued bonds depend on the technical degree of the concerned work.

These specialized companies, called Sureties, thereby have a special relationship with their client, often exclusive, and devote themselves to carrying out regular diligences on their activity and its resulting financial position.

In Latin America (Mexico, Colombia, Venezuela…), insurers are the reference issuers of bonds in a legal framework often highly regulated. For example, in Colombia, public buyers call for the issuance of a guarantee which includes multiple aspects (performance but also liability) and for which the amount can reach 100% of the contract value.

To export to this continent, companies can solicit their usual bank(s): some banks are capable of identifying a local insurer whom they will emit a stand‐by letter of credit. This solution combines several drawbacks: the company pays twice; the stand‐by letter is a very “liquid” tool, a disadvantage worsened by the legal risk, in some countries, to use some local companies who might be tempted to pay too quickly in the event of the calling of the bonds. That is why it is better to seek a specialized broker who will put the company in touch with a Europe‐based insurer to issue the necessary bonds with legal comfort and minimal lower costs.

In Middle East and North Africa, it is legally excluded from resorting to insurers as direct issuers of bonds. Insurers can only participate in a pool led by the issuing bank.

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In Europe, an open‐spaced legal framework.

In Europe, the legal framework allows to use indifferently banks or insurers for the issuance of all the legal guarantees. The use of these insurers for domestic needs has been well known for several decades in most countries (Germany, Belgium, Spain, France, Netherlands…). Some insurers have even developed systems of deported issuance for bonds documents ‐ for the contractor ‐ thus reducing the administrative management when the company is to provide a high number of bonds.

However, export contracts usually mention "bank guarantees”, which implies that the exporter will use a bank to issue those needed bonds. Actually insurers have long been reluctant to intervene in the export market, because of their lack of international network and relays, necessarily meant to be activated when issuing a bond as well as during its life.

In Asia, the use of bankers as issuers is still a dominant practice in many countries; the use of insurers for the issuance of contract bonds requires initiating buyers into this possibility during contract negotiations.

A strategy for the exporters. In this context, a well‐advised company should call for capacities using the two types of issuers in order to be able to export without disadvantages on the different continents and to access unrestrainedly to all global markets.

For the exporter, the use of the insurers can limit the number of banks on a project, which simplifies the distribution of banking products and flows. These total capacities can be used in pools alternately led by a bank or an insurer depending on the country. This allows optimizing both costs and legal security.

For a bank‐insurance balanced co‐operation.

Between bankers and insurers, it is a well understood collaboration rather than competition. While the banks regulation of prudential supervision is not quite neutral, Basel II plan is still a significant step forward because it makes


commonplace the use of “no‐bankers” partners as regards to the solvency ratio. However, some medium sized banking institutions can still be bothered by the major risks ratio as long as the adjusting started by the regulator has not been completed.

As a result, some banks, according to their own financial characteristics, can still be discouraged from syndicating with insurers rather than with other banks. They would in fact find some operational compensation, as they would no longer be approached by the other banks in order to share their products.

For the banker, an insurer as a partner could provide capacities where he has a need for it. He does not ask for compensation in terms of flow management and banking products sharing, such as the confirmation of payment instruments. Some bankers have already understood the leverage effect obtained by the collaboration with insurers.

Paris has recently expanded in a significant centre for the insurance of contract bonds on export markets, where insurers can call up capacities of 150 to 200 million euros for only one transaction, assuming a good signature. While the use of insurers is no panacea compared to banks issuance potential, it certainly increases the overall capacity for the exporter. It will avoid him tense situations after having signed a contract while enabling him to access highly regulated markets from the American continent and reducing his legal risk. At the same time, it will kindly put pressure on the issuance costs, bringing them to a lower rate.

N°1496 – 31st May 2001

Ten questions and answers to a specialised broker

France Arnaud de Taddéo

Solmondo Specialized broker in international insurances

1‐ What is political risk and how is it different from country risk? The analysis of country risk is one of the first work done by an investor, and it deals with evaluating the pros and cons of the investment. It's a crucial parameter when it comes to decide whether to invest or not, as rentability is dependent on it. The "political" risk as such is a part of it but it deals with public authority, government action, which can generate losses for private operators on investments as well as on benefits. This risk can emerge in various forms:

- Confiscation, expropriation, nationalization - Destruction of current assets, sabotage of assets during riots, civil war or

international conflict. - Deprivation of the company's dividends and benefits outside the host country caused

by a shortage in local currencies, or inconvertibility. - No respect by the State of its contractual commitment.

For example, Poland which is entering the European Union soon, has had many disputes with investors (Pernod‐Ricard, Eureko, Béghin‐Say); and insecurity in the Salomon Islands drove a mining development company to stop its activity. Political Risk do exist and it has occurred over the past years in all its forms, even the most traditionnal, and in all the main regions in the world, causing most of the time serious damages to investors.

2‐ More than Nationalisation and Expropriation, what kind of political risks can harm investors?

Simple confiscation still remains. However,"creeeping nationalisation" are getting more harmful and deal with: unplanified power cuts, non‐attribution of export or import licences which are essential to the development of the company, activity practive made difficult because of insecurity or public disturbance. However China is entering the WTO soon, it imposes hard to get admnistrative authorization to electronic product made locally by foreign investors.


The private market for insurance can deal with more than just confiscation, in other words, all the various forms of functioning impediment from insecurity to changing in local rules.

3‐ What are the consequences for the investor? Functioning impediments drives to losses and the end of the activity: it's a real risk! Covering it, is something rather difficult, and it is necessary for the broker to understand thoroughly the development of the local company and the kind of benefits it has. In other words, he has to define the technical characteristics of the product so that, in case of a crisis, the indemnisation can be quickly calculated without any dispute between the company and the insurer. The private market for insurance can adapt to the perception that investors have of their risks, and clauses in the policies evoluate under the influence of specialized brokers.

4‐ What are the bodies able of providing cover of investment against political risk (public procedures, private market?)

The political risk market was public at first, and organized by the well known public operators (Coface in France, Hermès in Germany, Opic in the USA, Ducroire in Belgium). It was completed by a multilateral tool of the World Bank Group, the Miga. Those actors work with public funding. A private market emerged in the 80's. The capacities available on the private market have exploded for the last two years and were above 2000 billion dollars in 2001 (investments and business contract). On this market, risks are covered for longer and longer period of time and damages are being paid. Its new dynamism arise also thanks to its inventiveness and light method of premium calculus; giving the chance to investors to avoid public actors and to use public money. Moreover, the private market remains really confidential in its policies, which is a good protection for both the investor and the insurer. That is not the case for public insurers whether they are nationals or multilaterals (Miga). Those actors tend to think that public announcement to local authorities can have a dissuasive impact on illegal appropriation. However, it appears to be investor's role to decide what's best for him.

5‐ What the other advantages of being covered for political risk? Insurance on political risk makes financial deals better, as it enlightens regulatory constraints on Banks which results in a reduction of the global cost and can even enable to rise funds that wouldn't be used otherwise. It is also a way for the company to get a better notation by Bankers and financial analysts when the action is quoted.

6‐ Does the investor have to get covered for all risks or can he get a personalized coverage? Most brokers propose personalized coverage and not a standard product. For each customer, they identify the risks, so that they can get the proper cover from the insurers.

7‐ Are their any countries that cannot be insured?

In the case that some investor decides to invest in one country, it seems impossible that he doesn't find an insurer willing to provide him with a cover at reasonable price. Sometimes, insurers can refuse to cover one specific country because they are having a conflict with it, but it is really rare that a whole market is closed.

8‐ Apart from the investment itself, can private insurers provide a guarantee against a turnover drop and in what conditions?

The market can cover a downturn due to political risks. For example, the private Coface has created a product reimbursing a drop in the turnover due to a huge devaluation (25%).

9‐ Are their any means of reducing the cost for a guarantee on investments? There are many ways of doing it. First of all, unuseful covers can be avoided by evaluating the specific risks in the project. Then, it's better to avoid the case by case aproach (as it is done by the public insurers), as it is always costly. Hence, it doesn't systematically cover latent risks and it makes the investor look for a protection towards the most visible risks which are also the most expensive ones. On the contrary, the global cover enables important savings on premiums thanks to the flexibility of calculus on the private market, which is the reason why multinationial companies are now getting insurance this way, letting down the dangerous practice of autoinsurance.

10‐ Is it necessary to deal with a broker? In France, the public insurer doen't work with brokers, but this is not true everywhere else, ECGD in London or Miga like to work with a broker as well as woth all the biggest private insurers (like AIG). This improves transparency and creativity on the market and then the service provided to investors. Brokers' role is to encourage insurers to propose adapted products to customers' needs. Nothing is impossible to a good broker, as there are solutions for all risks if they know how to invent and to present it.


14th May 2004

The political risks insurances on investments Some risks are dependent on local politic parameters upon which investors don’t have a good hold on. However, there are some solutions to transfer those risks.

A decision to invest relies on commercial, technical and financial data coming under the investor know‐how and the atmosphere describing the political environment and its perspectives.

For an investor, the political risk comes from the social and economical environment which makes it hard to have a good anticipation on the impacts. If the analysts do have an opinion on political risk, it is more about the general climate in politics, administration and finances.

However, such information dealing with the local politicians and their strategies as well as the macroeconomic parameters influencing political and social evolutions, are not determining the investor’s and its goods direct security. This information is an indicator of the general business climate.

The events hardly ever occur as expected.

The political risk form

The first family of risks deal with the privatization of the company ownership: confiscation or difficulty to operate on the long term. In this case, the will to damage the company ends up in the end of its activities or to deprivation (non renewal of export and import licences, harbour authorizations, paperwork, irregularly provided energy…) The changes in regulations are into this scope when it deals with discriminatory measures towards one or more international companies. The political risk can also come from a government incapability to safeguard peace which leads to the destruction of assets because of political violence: riots, civil wars, international conflicts, acts of terrorism… The government incapability can also deal with the financial conditions of the activity; convertibility loss, hard execution of financial transfers (reimbursements, dividends…) For those three families of risks, specialized insurers propose covers. However, when the local firm is individually victim of repeated and unjustified controls, it is not considered a disaster unless the investor can prove that he has to cease his activities in the specific country and that there is a direct link of causality. Hence, this risk is only covered in case of forced desertion.

Some insurers do accept in some circumstances, to guarantee the operating loss, that is to say to indemnify the consequences on the operating account if one of the generated facts previously presented happens. For such a kind of cover « sur‐mesure », the specialized broker will be able to adapt the market products in order to optimize the policy structure according to the activity specificities as well as the investor’s international strategy of implementation.

The recent case of the Ivory crisis is a good illustration of what can happen to a foreign company in a disturbed environment. The types of violence giving rise to material destructions are easy to picture: looting, machinery breaking, requisitioning of vehicles. The confiscations that occurred since 2000 were a lot more discrete.

When governments change, the prior transactions (privatizations, market contracts) are being disputed, and the force is then used to expel with submachine guns « in the name of the law », occupants suddenly judged as none legitimate. As a result, a French Building company couldn’t take advantage of its investments more than a few months (2000). Moreover, the geographical partition at the end of 2002 split the Northern activities with the Abidjan port giving the idea to the « rebels » that the property was vacant. As a result, the Vakoua sawmill and the Ity Gold mine were lost by their owner. Transfer or keep the risk?

The choice to keep or to transfer the country risk to an insurer can happen according to various criteria: ‐ The low capitalistic activities don’t usually need to secure investments. However, when

it deals with commercial activities, they often are a favourite target during riots. In this case, it is then enough to get a specific insurance for stocks when they are located in sensitive areas.

‐ The high capitalistic activities are hardly penalized when an incident makes the loss of the production tools. Hence, it is highly recommended to transfer the risk to someone else. (It is even more the case as most of the time, the return on investments is low).

‐ When the return on investment is quick, it is not necessarily pertinent to subscribe for insurance on the initial investment. The cover for the operating margin gets very important in this case, as long as there is a simple method of calculus when a sinister happens.

‐ When the head office is highly dependent on the external production (commercialization, integration in the production chain) it is vital to plan an insurance « loss of production » to avoid that an activity stopping due to political reasons in one of the foreign subsidiaries creates a severe degradation of the head office.

‐ When a group has settled in various countries, it has long been considered that the investor was covering a form of risks division and that the individual loss of each investor was not significant. However, a loss remains a loss and if each entity of a large group had to consider itself as a simple drop of water in the whole, large groups wouldn’t survive long.


Since the investors have understood that insurers adapt premiums when they cover an investments portfolio, and that those related to the total insured capital can be divided by 2, 10 or even 100 according to the geographical diversity of risks, the amount of establishments and their spreading about, the multinational companies get covered with « World » policies. One exception is a French public institution considering that auto insurance is more pertinent as the premium is low.

As a matter of fact, the political risk is a « catastrophic » risk upon which the large numbers law cannot apply. As evidence, the multinational companies having captive insurance for their current risks are unsure about including a too wide part of political risk.

The shareholder point of view. As long as shareholders, auditors and bankers don’t have a good knowledge of existing policies, there is impunity about neglecting the cover of such a risk and upon confiscations already quoted no cover was forecasted. The managers could have been held responsible, if insurances on fire were not subscribed, which is still not the case in France for Political risk. Most of the time, the people responsible for the project would rather seek direct profitability and avoid paying superfluous premiums, not considering the shareholder’s risks, which modelization is not easy.

The political risk insurance is also a financial tool, and it can be determining to succeed when finishing off a financing or when reducing the global cost when Banks don’t have their provisions obligations anymore. When the head office guarantee is needed for an exotic investment, the use of an insurance policy enables to unburden the parent company from all the political generating facts while « cleaning » its financial states column out of the balance sheet. How do insurers decide to cover or not to cover?

The insurers decision whether or not to cover a risk can be astonishing and it’s important to understand the logic. Insurers want to first check the image of the investor, its know‐how and its professional experience in the sector in which he is investing his reputation, his negotiations methods and his behaviour in business. They want to have a long term relationship with the help of the broker.

They will focus on the hosting country later on and still in parallel with the activity: it is the interactive couple which is determining. Hence, the political risk sensitivity is the result of a combination of interactions linked to a more or less strategic activity for this country and also to the technical nature of the know‐how which makes the operator more or less easy to replace. Before commenting on a risk, the insurer looks closely at his capacity of recovering the indemnified amounts. Hence, when the investor has to exit after damage, the insurer becomes the title holder of the local company. The more or less good knowledge of the country is important as well as the long term nature or not of the investment. In some heavy industries or in the intensive agriculture, the stopping of an activity can be harmful.

In this case, after indemnification, the insurer becomes the owner of an investment which has no value anymore, and it deprives him from any means of recovery. In tough countries, the insurer can adopt the strategy to insure a sufficient number of risks being different in this country to raise the amount of the premium. As the private market gets developed, the products evolve under the competition pressure to respond better to the investor’s needs. Nowadays, as a specialized broker, I can say that any investment, if pertinent from the investor’s eye, has to find some kind of a cover. France Arnaud de Taddéo Solmondo Specialized broker in international insurances


N°1450‐1451 ‐ 13‐20th July 2000

Not getting covered for political risk is a management fault

Shareholders and financial operators are more and more concerned about covering the

political risk. It is not the case of all the companies investing in countries out of the OEDC. They sometimes suffer from important financial losses.

The Globalization makes us think that the Earth is just a little planet where there is a world economic order. However, each country keeps its sovereignty and political instability is a source if uncertainty for private investors. The new governments are tempted to make different choices than the ones of their predecessors to be recognized, by creating a dominant religion, refunding to deal with former certified intermediaries or launching destructive campaign of extermination of minorities. The current events show a serie of events which financial consequences can be heavy for companies: will of the Zimbabwe President, Robert Mugabe, to expropriate white farmers without any indemnisation, populists announcements of his Venezuelan homolog, Hugo Chavez, suspension of the national currency convertibility in Indonesia, refusal of the Chinese central government to help the regional bodies in their financial difficulties, coup d'Etat in the Ivory Coast leading to the abrogation of the Constitution, institution of the charia in Nigeria, extermination wars in Kosovo and in Chechenia, sanctions towards Austria. The Chief executive is not responsible for the related damages but they are directly or indirectly caused by the public authority. In risky countries (the whole world apart from the OECD), the political risk arises in various forms:

- Confiscation, expropriation, nationalization, or in more informal ways, difficulty to operate because of persistent public disorder or discriminatory measures (no renewal of permits for mining development, non‐allocation of export licences to Europe for vegetables producers)

- Destruction of current assets, sabotage of assets during riots, civil war or international conflict.

- Deprivation of the company's dividends and benefits outside the host country caused by a shortage in local currencies, or inconvertibility.

There are also risks for companies getting a contract with the State, when selling equipments or ready to use units dedicated to the management of a public service or an

infrastructure, as those contracts are operated on the long term whereas the needs and priorities of an unstable country can change suddenly and quickly. The State can fail to honor his agreements and the contract can be abusively terminated without any indemnisation as it was stipulated.

Who is responsible for this? Bankers usually make provisions when operating in risky countries, as required by the Banking Commission. Those are fiscally deductible. On their side, exporters are used to transfer risks to insurers or bankers as a way to secure their operations and financial results. Finally, importers get usually covered for delivery failures when goods are part of a major contract. However, companies investing in risky countries (banks or industrial firms), as well as those creating subsidiaries don't often feel the need to get covered for those assets in the balance sheet. When deciding to settle in a country out of the OECD, the investor that political risk doesn't exist. Along time, he feels protected thanks to his network and/or know‐how. However, around the world, companies which sizes and know‐how make them untouchables are extremely rare and even managers of multinational firms can be sequestrated, incarcerated and even murdered.

Statistically speaking, it is true that damages linked to government action are most of the time exceptional, which makes investors consider a zero risk. However, financial losses due to political risk and hitting companies in foreign countries, can be huge. Hence, political risk on out‐of‐OECD investments is a real financial risk, even if note readable as such in the main company balance sheet. One can observe that most companies get insurance after they have been through a major damage.

For the last couple years, the international market for the insurance in political risk is particularly dynamic. At first, it was limited to the public insurers, but in the eighties, the market opened to private insurers. As a result, there are new insurance companies arising on the London market. Private and public insurers work together on this specific risk. They work with the same specialized brokers, which enables them to have a good follow‐up of the customers’ needs. They also use the same reinsurers, which enables a good harmonization of the products. The abundance of products covering political risk on investments refrains companies from using simple implicit auto insurance. Some products are made to get protected at a reasonable price (from 0,4% to 2% per year of the insured amount, according risks) and on the long term (five years, ten years, fifteen years…); the profit sharing of the parent company being durably consolidated at a tariff known by advance.

The market does exist and work properly: most of the time, indemnisations are important. As an example, in Indonesia, an American company had concluded with the Indonesian government the building of two geothermal energy production units, the national company of electric distribution having to buy the produced energy on two sites. As the


public company has finally refused to honor its commitment, the insurers had to repay 290 million dollars indemnities to the American company.

In those circumstances, the analysts don't understand why companies prefer "implicit auto insurance". The level of profitability which is usually high in risky countries make the insurance premium painless and the auto insurance, by its reserves making, is not fiscally significant, as some possible provisions for country risk are not deductible for a non‐banking company. When the investor is confident, he would rather not cover his risk. However, it is also the time when the insurer will accept to take his risk burden at a low rate and on the long term. Moreover, the broker inventiveness enables to optimize the set up to reduce the premium without damaging the cover. Then, if the situation deteriorates, the insurer linked by contract to the assured will still carry the risk at a very good rate. Some polls among professional analysts are very instructive. Notations agencies, auditors, bankers, portfolio managers and shareholders are more and more interested in the foreign investment protection policy carried out by companies.

At the time being, the traditional auditors, during annual audits, don't seem to be concerned when a company isn't covered for its foreign investments in emerging risky countries. However, during exceptional operations (acquisition audit, stock exchange introduction), the non‐protected assets are made below par rating. The value of the company is reduced of the same amount.

A small domestic company can choose to assume those risks, if it doesn't use external financing (from the Bank or the Stock Exchange), but when it deals with a company from the Stock Exchange Market, it has to be extremely careful. This implicit autoinsurance practice is particularly dangerous for industrial firms, which property has a significant renewal value, as financial losses coming from those risks can be high. The European analysts are now doing the same than the British Notation Agencies to punish the absence of risk management and the non‐protection of sensitive assets.

France Arnaud de Taddéo Solmondo

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