Multinational companies are used to dealing with political risk, but not from the biggest, most developed markets in the world—and insurance policies haven’t caught up.
The election of Donald Trump in the US and growth of nationalist, antiglobalization sentiment in the UK, France and other developed economies present new risks for companies trading and investing around the world. With these developments not fully realized, the uncertainty has corporate executives considering whether they have the right insurance for the new environment.
“Every international company is worried about where the anti-globalization trend is going,” says Dan Riordan, head of the political risk insurance unit at Dublin-based underwriter XL Catlin. Political risk has been one of the fastest-growing segments of the insurance market since the terrorist attacks of 9/11, with written premiums of $8.1 billion in 2015, according to KPMG. Riordan says client inquiries about political risk insurance are up about 20% just in the last year, with some companies looking to buy coverage for the first time, others to bulk up existing policies. “It’s not just in the US,” says Riordan. “It’s everywhere, and it’s a big worry. Companies ignore the issue at their own peril.”
Yet insurance is expensive and the products may not fit the perils. “There is no Donald Trump insurance,” says John Forester, CFO of auto and truck parts manufacturer DBG Canada and chair of the treasury and capital markets committee at Financial Executives International Canada. DBG has manufacturing facilities in Canada and Mexico with half of its production going to the US. Forester would sooner put money he might spend on insurance premiums in the bank to use later if needed. “When people need political risk insurance, it’s too expensive,” he says.
Political risk insurance traditionally has covered events such as government expropriation of assets, sovereign default, imposition of foreign exchange controls, embargoes or trade sanctions, war and terrorism. While political risk insurance contracts vary, most policies likely won’t cover the costs to corporations of changes in trade policies.
“Political risk insurance is designed for catastrophic events,” explains Stephen Kay, U.S. practice leader for political risk at insurance broker Marsh USA. “The insurance industry and their products aren’t well-suited to this kind of environment.”
President Trump indeed presents a major challenge for companies that have invested overseas and built up global supply chains. He has pulled the US out of the Trans-Pacific Partnership trade agreement and he intends to renegotiate the more than 20-year-old North American Free Trade Agreement with Canada and Mexico — the second- and third-largest exporters to the US. He has also railed against the unfair trading practices of China, which exported $482 billion in goods to the US in 2015. The US trade deficit with China that year was $366 billion.
What Trump’s rhetoric about putting America first and negotiating “better deals” with its trading partners could mean is not yet clear. It will likely involve new tariffs and potential retaliation from other countries. Trade wars undermine general business conditions for global importers and exporters alike and reduce the value of investments made in markets around the world.
“My world has always been focused on emerging markets. Now we see political uncertainty on our doorstep,” said Kay, who is based in New York. “We’ve gone from being the foremost proponent of free trade to something else. Our own government is threatening to rip up trade agreements and put up tariffs.”
The US is not the only country to shift inward. The ramifications of Brexit are still unknown. Nationalist protests in Italy have become worrisome and if Marine Le Pen wins the election in France this month, the European Union itself could be threatened.
“The more uncertain things are, the more pressure there is on companies and the investment decisions they make,” says Vinco David, secretary general of the Berne Union, a Switzerland-based association representing insurance companies whose members insured 11% of the $19 trillion of world trade volume in 2015. David says companies are taking a wait-and-see attitude on political developments: “It’s too early to understand the risks of the US election and the Brexit vote. I’m not sure they know the direction of future policy even in Washington.”
The growing nationalist sentiment in developed markets, however, has not dramatically increased the risk profiles of those countries as much as the emerging markets that depend on trade with them. Marsh’s annual political risk map of the world still marks emerging markets as riskiest. Mexico—Trump’s favorite target—saw its rating drop more than two points due to uncertainties around trade and immigration with the US. And while credit insurance against risk of nonpayment by governments and businesses is available, prices are becoming prohibitive for credits in countries heavily dependent on exports to the US.
One corner of the political risk market drawing interest from corporate executives is trade disruption insurance. The triggers for policy coverage, however, are again events like political upheaval or natural catastrophes. Companies with a TDI policy could make a claim under the policy for losses suffered as a result of new trade barriers, but unless they are specifically spelled out in the contract, they likely will not be covered.
“The product exists but it doesn’t have the depth and sales that other political risk products have,” Kay says. “It’s hard to pick the risks you’ll cover and hard to price them.” Underwriters are also wary of developing concentrations of risk in a few countries where demand for TDI coverage is high. “Insurance companies don’t have a response to this,” Kay says. “They may never have one.”
David suggests that corporate leaders anticipate the impact of potential trade barriers on their business, and consider their partners’ businesses as well as their own. Any firm heavily dependent on exports to the US could be vulnerable. The best protection may be good contingency planning. “Many companies can adapt to circumstances,” says David. “They can find new sources of supply and if US exports decline, they can look for new markets.”
In this environment, adaptability may be the best insurance.