Aon Political Risk White Paper_2014

8/12/2019 Aon Political Risk White Paper_2014

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A o n P o l i t i c a l R i s k s i n S u b - S a h a r a n A f r i c a 2 0 1 4 P o w e r

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Political Risks inSub-Saharan Africa

A view from thePower Sector 2014 | Power

Aon Risk Solutions Aon Broking


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A o n L o n d o n M a r k e t R e v i e w 2 0 1 3 P r o p e r t y & C a s u a l t y A o n P o l i t i c a l R i s k s i n S u b - S a h a r a n A f r i c a 2 0 1 4 P o w e r

Contents.Introduction 1

Methodology 2

Key challenges for the Power 3market entering Sub-Saharan Africa

Long term investments amidst sudden political shifts 6

Understanding the complexity of the projects 7

Established vs new technology for 8the African power generation mix

Change in type and demand for political risk cover 9

The role of multilateral organisations 11and export credit agencies (ECAs)

Regional Overview 13

Aon Political Risk Tools 14

The evolving political risk landscape - 16 What your organisation needs to know.

Conclusion 18


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Introduction.

Power as the cornerstone to economic growth

Over the last centuries the world has witnessedeconomic progress that has materially improved thelives of many, especially in emerging markets. Yetalmost half the people in the world without accessto electricity live in the 48 Sub-Saharan Africancountries . The World Bank estimates that the cost ofnancing access to electricity world-wide by 2030will cost about USD 860bn and over 30% of this willbe needed for Sub-Saharan Africa infrastructure. 1

Globalisation and market liberalisation play a majorrole in economic growth, but an underpinning factor

is the role of power generation and transmission.Peter Voser, Chief Executive of Royal Dutch Shell,explains in the World Economic Forum : Energyis the oxygen of the economy and the life-bloodof growth, particularly in the mass industrializationphase that emerging economic giants are facingtoday as their per capita GDP moves betweenapproximately USD 5,000 and USD 15,000. 2

According to IRENA , Africa currently has 147 GW ofinstalled capacity, a level comparable to the capacityChina installs in one or two years. 3 The population

of Africa is growing rapidly (2.3% per year). At thesame time, per capita income levels are rising andAfrica is urbanising. These three trends will driveenergy demand, growth and consumption patternsin the coming decades.

Voser argues that the growth pace will outstrip thenormal capacity in many markets. What is needed tokeep pace with the thirst for growth is new meansof collaboration across traditional borders includingthe public private sphere and there must beframeworks in place that encourage collaboration.

An example of this is the crucial transmission gridlinking the Eastern Africa Power Pool (EAPP) and

Southern African Power Pool (SAPP) that will createthe backbone for the Africa Clean Energy Corridor(ACEC), according to IRENA.

Whilst these are not ground-breaking revelations,many of these ambitions are harder to achieve inreality and these types of economic stressors canoften lead to turbulence and political volatility.

In economies where the growth rate is very high thesecurity of power becomes critical. Many investorsand owners of power generation assets are turning

their eye to Sub-Saharan Africa as the region providesthem growth opportunity outside their local markets.

At the same time the world has witnessed politicalrisk incidents such as the Arab Spring, unrest inEgypt, civil unrest in Vietnam and the Ukraine- regions and countries which in the past weredeemed stable. In certain cases Aon has seencompanies willing to take a rather substantialamount of risk on their own balance sheet to enablegrowth against a geopolitical landscape that isunknown and unstable and where unforeseeablerisks can take place at a very short notice.

The Global Aon Power Specialty has teamed upwith the German Aon Political Risk Team at AonCredit International Insurance Broker GmBH (ACI) togain insight into the opinions of some of the mostexperienced underwriters on this particular topic.

This paper aims to share the challenges, concernsand advice of leaders in the market to provideinsights to companies investing in or owning a powergeneration or transmission asset in this region.

1 Source: World Bank: www.web.worldbank.org2 Source: World Economic Forum, Energy for Economic Growth Energy Vision Update 20123 Source: IRENA, Prospects for the African Power Sector, 2012


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Public measures / state interference Breach of the underlying contract or concession

agreements Import or export embargos or border closures Cancellation or non extension of licences Currency inconvertibility or transfer risks (CI & TR risks) Expropriation and creeping expropriation, conscation,

nationalisation or deprivation (CEND-risks)

Acts of war on land or of civil war, civilunrest terrorism, sabotage (as part ofpolitical violence cover)

Non honouring of arbitration award Fair and unfair calling of contractual bonds Non honouring of bank guarantees or

letters of credit

Denition of Political Risk

Methodology.

This paper is an opinion piece, not a scientic study.Aon chose key underwriters and other inuential

market participants to interview over the course of3 weeks. The interviewees were chosen based ontheir broad experience in the market as well as theirunique insight they could give us on the topic.

The term emerging markets for this paper hasbeen dened as non OECD and EU countries. This isa denition that is the most common in the privatepolitical risk insurance market. Nevertheless, it isimportant to note that multilaterals such as theMultilateral Investment Guarantee Agency (MIGA)would broaden the denition to eligible and non-eligible countries without a direct distinction if acountry belongs to EU or OECD.

The same applies for The Islamic Corporation for theInsurance of Investment and Export Credit (ICIEC)

or The African Trade Insurance Agency (ATI), whichhave eligible member countries listed on theirhomepages.

According to the volume and type of inquiries Aonhas seen in certain markets we have focused ourline of questions around Sub-Saharan Africa, as thisis where Aon has seen the most demand for politicalrisk cover in recent times in terms of emergingmarkets. Although each and every project needs tobe assessed on its own merits, many observationsregarding the necessity of political risk cover in thisregion have wider applications for all emergingmarkets.

Political risks are also classed as sudden changes in local certication rules or newly established unexpectedsecurity rules. The same applies also to higher import taxes or in provision changes regarding the local contentor regarding the number of local employees which should be suddenly hired.

Political risk refers to losses caused by:The actions or inactions of a government (host or export country), a third-party country or supranationalentity (e.g. UN, EU)

These actions may deprive a client of its assets, prevent or restrict the performance of a contract and have aninuence on the repayment of loans to nancing banks and lenders. The risk is always outside the control ofbuyer and seller.

These risks can be caused by changes in a countrys political structure e.g. prior or after elections.An exporter or investor might suffer losses based on e.g. :


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The below map highlights the planned upcomingprojects identied under the Programme forInfrastructure Development in Africa called PIDA.The North South Transmission Corridor will equalto 8000 km of transmission from Egypt throughSudan, South Sudan, Ethiopia, Kenya, Malawi,Mozambique, Zambia and Zimbabwe to SouthAfrica. This line should be completed by 2020. TheCentral Africa Transmission Corridor which covers a

length of 3800 km will link the DRC to South Africathrough Angola and Namibia and to Chad includingEquatorial Guinea, Gabon and Cameroon. (Source:Irena 2011 / Prospects for the African Power Sector)

Apart from these crucial transmission lines, severallocal projects are taking place. All these projectscould face risks covered by an all risk policy typebut also political risks based on various kind ofpolitical tensions fuelled by poverty, ideology orethics. These phenomena may be supported byscheduled or unscheduled elections, general civilunrest in the border regions of the respectivecountries, hostilities between the different religious

or ethical groups or ghts regarding various kindof commodities (oil & gas, minerals) for example. Violent attacks are often politically and nanciallymotivated. Western companies are often critical to aregions energy needs and tend to get targeted dueto terrorism or political violence.

Source: Irena


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Long terminvestmentsamidst suddenpolitical shifts.

Werner Richter Regional Head of Credit, Surety andSpecial Risk of Kiln Europe S.A. (KILN) explains thatthere is a discrepancy between long term investmentsneeded for power projects versus the short timeframes in which the political landscapes can change.

Underwriters are cautious to give long tenors forpolitical risk cover under these circumstances. Alot of analysis goes into this (tenor of policy) and

careful consideration goes into the tenor of politicalregimes but you cannot predict if these might beforcibly changed. During election times this becomes

challenging, so we try to tailor the tenor of theinsurance policy to a manageable period. Therewould be a maximum tenor of 10 years but we havetaken an active decision to moderate the tenor to3-5 years in most cases, he says.

Thomas Dietz, Head of Global and Special Productsfor Central and Eastern Europe tells us that AtradiusSpecial Products also does not look at very long

tenors: Depending on the project we wouldlook at 7 years e.g. based on a Ministry of FinanceGuarantee.

Country Date Type of election

Guinea-Bissau 3/16/2014 General

South Africa 05/07/2014 General

Guinea-Biss au 5/18/2014 President ial

Malawi 5/20/2014 GeneralNigeria 31/12/2015 Presidential

Chad 02/2015 Parliamentary

Ethiopia 05/2015 General

Mauritius 21/06/2014 Presidential

Burundi 06/2015 General

Ivory Coast 10/2015 Presidential

Tanzania 31/12/ 2015 Presidential and Parliamentary

Mozambique 15/10/2015 Presidential

Namibia 31/10/2014 Presidential

Togo 31/03/2015 Presidential

Comoros 02/11/2014 Presidential

Upcoming elections in Sub-Saharan Africa


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Understanding thecomplexity of theprojects.

Constructing a power project often involves manydifferent stakeholders, joint venture partners anddifferent lender structures when entering emergingmarkets. The ownership as well as supply chainstructure are critical for underwriters to understandin order to be comfortable with a project.

Jef Vincent of ATI informs us that the problem isthat in order to underwrite the risk, you need to

understand the whole supply chain. There is alsooften too much emphasis on power generation incomparison to power transmission. For examplethere is a new power plant in the Mombasa regionthat cannot operate at full capacity because thetransmission line needs to be upgraded. Thereforee.g. in Nairobi there is a lack of power.

So you need to look at the feasibility of the wholeproject i.e. who pays for it, what is the offtakeagreement and will there be an infrastructureupgrade.

I have seen a wind project where all differentproject partners had different insurers and so theproject had many complex layers. Construction wasalso delayed because the transmission line was notnished. Yet under the PPA the project had to beready by a certain date.

Underwriters will want to know how the deal isnanced and will ask the question if a project is justanother white elephant.

It is critical to understand ownership structures.This is a critical path of what we do. Some clientshave difficulty in describing the ownerships andcontractual relationships. In these instances we cangive a broad indication of our appetite but until wehave the nal picture we cannot issue any cover,

Wilkinson says.

Leonardo Pinto, an independent Credit Risk and

Insurance Consultant with experience in the LatinAmerican markets says: Many companies in LatinAmerica are more adapted to emerging marketswhen you compare them to companies in Europefor example, so they have a good understanding ofthe clients dynamics and become more exible andprepared for unforseen events rather than relyingon what has been agreed in the contracts.


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Change in typeand demand forpolitical risk cover.

During the interviews underwriters disclosed thatthey had witnessed governments quickly blamingforeign contractors for circumstances where theyhave an energy crisis marked by black and brownouts. Creeping expropriation then often occursthrough new taxes, price xing and new burdenson import tariffs. Egnell says this makes life for theinvestors impossible. Many of the governmentsparticularly in Africa often feel pressured to enactthese measures by the local population who areprotesting against the high prices and means ofdistribution.

Underwriters over the past years have seencompanies wanting to know how to cover risks inmarkets where there is a deregulated transmissionand distribution market.

Traditionally insurers will cover breach of contractand breach of concessions normally based on thenon-honouring of an arbitration award. However,the market has seen some losses in this sector andso underwriters have become very cautious aboutthis cover, according to Egnell.

Many companies are also eager to protectthemselves against changes in feed in tariffs. Dietzsays this is extremely difficult to insure. However,in certain cases MIGA considers covering changesin feed in tariffs. It believes governments may havethe right to change the underlying contract, butcompanies must in this case be compensated forany loss of earnings by the respective government.Khalid adds that feed in tariffs are part of the

power offtake agreement so any breach of thisagreement would be covered by insurance onceit has gone through the arbitration process. Yetwhat it does not cover is certain regulatory risk.This is for example, if a government decided todevalue a currency we could not cover the changesthis would make to the feed in tariffs. Aon pointsout that it is vital that the scope of cover offered isanalysed well in advance so that all parties involvedare in agreement to which perils will be covered incase of a claim.

Many investors want the same level and breadthof coverage for each country but the premium rateswill vary greatly based on the country risk and thelegal surrounding, Lokshin explains.

Before 2009/2010 conscation cover almostdisappeared from the market. But ever since suchincidents like the Arab Spring we have seen anincreased demand, Lokshin adds.

Egnell says there is the contractual side of thePower generation sector which is most concernedabout default of a counterpart as a lot of theseentities live from subsidies in emerging markets.

If a government decided todevalue a currency we could not

cover the changes this wouldmake to the feed in tariffs.


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They are also most concerned with expropriationand creeping expropriation as well as breach ofconcessions.

Another type of cover that is more frequentlyrequested is contingent business interruptionfollowing political violence and cover against non-transfer of dividends. As a loss mitigation processwe see some investors become extremely clever athow they manage to repatriate dividends with thehelp of local corporations, Egnell says.

Vincent adds: Market practice is to insurearbitration award default, but arbitration isexpensive so insurers hope that both parties willcome to a commercial agreement. Here we haveseen an increase in demand for political risk cover.

we see some investorsbecome extremely clever athow they manage to repatriate

dividends with the help oflocal corporations.


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The role ofmultilateralorganisationsand export creditagencies (ECAs).

Large long-term projects in the region tendto need to have either the involvement ofmultilaterals such as MIGA (Multilateral Investment

Guarantee Agency part of the World BankGroup), ICIEC (The Islamic Corporation for theInsurance of Investment and Export Credit partof the Islamic Development Bank Group), ATI(African Trade Insurance) or the support of anexport credit agency (ECA). Depending on theproject and its nancial structure, Aon is seeing agreater collaboration between these entities andthe commercial political risk insurance market tocombine know how and capacity.

Aon has witnessed that the multilaterals and

ECAs will often look at projects that are difficultto cover purely in the commercial market. Theyare also often able to provide longer tenors forprojects, which is often crucial for Power projects.Khalid says: We can offer a 15 year tenor and insome cases up to 20 years. In cases of strategicprojects of bigger investment amounts beyond ourinternal capacity, we can front the insurance andobtain reinsurance support from other multilateralinsurers and the Lloyds market. Aon has alsowitnessed MIGA offering similar lines even up toUSD 200M for tenors between 10-12 years forcertain projects.

As the demand is changing, these multilaterals andECAs have developed further solutions. For example,the ATI can issue letters of credit to help overcome

the waiting period in a claims case to stop paymentdefaults occurring.

Vincent explains that many governments areunwilling to give a Ministry of Finance (MoF)Guarantee, as the state does not want to have thison its balance sheet, as a MoF Guarantee adds tonational debt and this is monitored by the IMF.Instead of the MoF Guarantees, governmental bodiesoften issue a type of letter of comfort. However,many believe that only a MoF Guarantee holds a trueand secure value.

Depending on the sovereign risk and on the needfor power in a certain country, multilaterals mightrequest a MoF Guarantee as a security. In this casethe risk the multilateral covers is the non-honoringof this MoF Guarantee. The non-honouring of a MoFGuarantee is also offered by the commercial politicalrisk insurance market. Prior to any policy inception itis vital to carefully check the exact scope of cover tobe bound.

MIGA on the other hand does not require a MoF

Guarantee. Antonio Barbalho, Global Head of


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Energy & Extractive Industries MIGA, explains:We do not request these as we assess the utilitiesor off taker directly and they need to meetthe MIGA criteria. If they dont we would thenmake suggestions to a client as to what letter orguarantee they would need from the government.

Barbalho believes MIGA can help many companiesduring the early stages of the project developmentthrough providing it with additional security: Weapproach governments pro-actively to see whattheir appetite for projects 2-3 years down the lineare. This means we have a priority list for projectsand can see early on if a project would get approvalfrom the host country.

Barbalho informs that MIGA is there to increase thecertainty of a project rather than make it better.The project still has to be sustainable in the longterm, he says. He adds that MIGA is increasinglyseeing new client groups like pension funds,

Chinese or Indian investor groups seeking cover forthe debt they are offering projects in the Africanmarkets. These types of lenders and investorsoften add new pressure to the insurance costs, ascover solutions need to be affordable but need tomeet certain regulatory requirements or return oninvestments.

According to William Pu from Aon Cofco the roleof the Chinese banks becomes more and moreimportant for the world economy. Most majorChinese banks are state-owned and listed alreadynow on the Fortune 50-list. In the future thesebanks will have new requests for political riskcover. These banks, e.g. Exim Bank of China, areseeking various kind of cover options through thecommercial insurance market and multilaterals.

Barbalho also revealed that MIGA is seeing manyentrants from the Chinese market.

He added that although MIGA plays a large role forprojects in this region there is space for all marketplayers: We tell clients that there are situationswhere the private market is more competitive andthey should to procure coverage there MIGA is mosthelpful when the credit of a project needs to beimproved.

Aon is seeing a greatercollaboration between theseentities and the commercial political risk insurancemarket to combine knowhow and capacity.


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RegionalOverview.

Our interviews revealed that it is hard to forecast,if the commercial political risk market or themultilaterals have appetite for a certain country

or type of project. The exact location of a projectis vital to understand, as many countries are largeand the political stability and legal framework cansubstantially vary. The experience of the investorsand nanciers is material to understand. Therefore,the following underwriter comments should beviewed as appetite indicators.

Barbalho from MIGA says that we will start to seemore cross border initiatives in Africa itself suchas Mozambique and Tanzania or Ivory Coast andGuinea. Furthermore, the South-South-trading

activities are increasing. For example, Braziliancompanies are seeking business across the wholeof Africa rather than just in Angola or Mozambique.The new challenge for any underwriter will be tosupport these transactions for substantial amountsof capacity and lengthy tenors.

Dietz says: There is a lot of activity in Congo butthis is a difficult country for us. Other interestingcountries are Ghana, Tanzania and Uganda. Wewould consider projects in Kenya, if the underlyingprojects parameters are acceptable.

Ghana has generally been one of the bettercountries, but a little while ago they had aninternal audit of certain PPA contracts that had

been awarded under a previous government,fearing that there had been corruption in awardingthese contracts. Angola, Mozambique andTanzania are also interesting countries, wherewe see large demand for energy infrastructure,

Wilkinson from Lancashire explains.

In terms of regions we are seeing good economicdevelopment in places such as Angola and Liberiain comparison to a few years ago where nobodyreally wanted to invest there, Lokshin says.

Vincent says: Historically most projects have beenhydro. In East Africa we are seeing a lot of potentialfor geothermal technology especially in Tanzania,Kenya and Ethiopia. This is expected to be a gamechanger. For projects in Kenya the hole has alreadybeen drilled, the availability of steam is guaranteedand there are already offtake agreements in place.


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Aon PoliticalRisk Tools.15 years of data tosupport rate tracking

and exposure mapping

The Aon Political Risk Map measures political riskin 163 countries and territories, in order to helpcompanies assess and analyse their exposure

to exchange transfer, legal and regulatory risk,political interference, political violence, sovereignnon-payment and supply chain disruption.Aons long-standing strength in Political Riskmanagement is complemented by partnering withRoubini Global Economics (RGE), an independent,global research rm founded in 2004 by renownedeconomist Nouriel Roubini, in order to takeadvantage of RGEs unique methodology.

On the right there are diagrams from the AonRate Tracker tool. This is a live rating guide for

political risk insurance, which provides historicand current market rates and capacity fortransactions. It facilitates accurate and instantbenchmarking for clients and can be used as avaluable reporting tool. At this stage it containsapproximately 5,000 transactions, 90,000 insurerindications, and 190 number of countries with 50insurers in 30 product lines.

The rst diagram shows a general overviewof the enquiries so far uploaded since 2000 inrespect of Power Sub-Saharan Africa. In total wehave 57 cases which are divided amongst the

stated countries. Based on this snapshot the mostenquiries are from Ethiopia and Ghana. The scopeof cover is spread between the cover solutions:

In total we have 57 caseswhich are divided amongst the stated countries. Based on this snapshot the most enquiries arefrom Ethiopia and Ghana.

Chart 1: Volume of Enquiry by Countryand Type of Enquiry for the Power Industry


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The diagram on the right shows the averagemarket rates and average capacity by year.It is a snapshot regarding the past 3 years.The requested enquiry volume has substantiallyincreased. Therefore in certain regions theremight be some capacity issues which is alsoreected in the development of the premium rates.

The Aon Political Risk Map, 2014

Abbreviations on Chart 1 Descriptions

PC & PS Public = Pre and Post-Shipment Public Obligor

UCG = Fair & Unfair Calling of Guarantees

Non Hon = Non Honouring of an Obligation by a Government / Post-Shipment

PC- Public = Pre Shipment Public Obligor

CEN = Conscation, Expropriation, Nationalisation

CCP = Comprehensive Contractors Plant

Conscation = Conscation

Chart 2: Average Market Rates for the Power Industry


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The evolvingpolitical risklandscape -

What yourorganisationneeds to know.

Lokshin explains it was not imaginable a few yearsago that a country such as Ukraine would nditself in such a political crisis: There are about 200

incidents around the world similar to Ukraine i.e.the local people are not satised with the balanceof political power. Even though these might not besuch acute risks compared to Ukraine, there is thepotential that they could escalate. On a Europeanlevel we could name Scotland, Catalonia, Ireland,Latvia, Romania and even Belgium where groupsare hoping for independency from the centralgovernment.

Most of the underwriters interviewed believecompanies do not have the means to cope with

these political risks. Lokshin states companiesoften like to try and do business under a localcontext: Many companies will also try and savewhere they can save and if they have done a fewsimilar projects they might try and simplify things.On the other side it should not be underestimatedthat global commercial war is developing withgovernments using and abusing economic andtrade sanctions in any potential diplomatic conict,which, as a consequence is increasing volatilityand costly uncertainties for the global economyin general and sometimes respective projects inparticular. It has to be said though that for large

power projects there are usually banks involvedwho will scrutinise the risks.

The advice he gives is to try and budget for thesekind of risks early even if they do not end upbeing transferred via insurance. He sees that manycompanies have not budgeted for these risks andthen want attractive cover from the market, but themarket will not respond to this as it is too late. Evenbig businesses can underestimate these risks.

Multilaterals such as ATI admit they are notequipped to cypher through data. We want tohave an experienced partner or consultant whocan guide us through all the technical questions,

Vincent says.He adds that the IMF requires parts of the loans tobe concessional so they will scramble to get theseand a lot of companies realise this is too late.

Pinto says companies should also pay attentionto their arbitration clauses and preferably chose achamber outside a host country and one which isperceived to be neutral such as Canada.

Many underwriters see a lot of projects on theirdesk very last minute. A signicant proportion ofprojects with tight deadlines that are rushed end


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up not getting cover, as the projects are usuallycomplex and underwriters need to get comfortablewith the ownership structures of a project.

Wilkinsons advice is to come to market early: Themore information we have the better. It also makesa huge difference hearing the information from thehorses mouth so to speak as projects can be verycomplex and we would like to have the opportunityto ask questions directly. Many dynamics of theproject are usually unique. When we work closelywith the project we have high success rates.

Kiln recommends approaching the projects throughrisk mapping and part of this will be risk mitigationand another option is transferring risks to insurers.

Some have the attitude that they should just goto the insurance company to get rid of the riskand get it covered for virtually free companiesneed to start thinking what is this risk worth tothem, Werner Richter says. He adds that thoseless experienced in risk management or politicalrisks should speak to an experienced broker or anunderwriter and take their advice that if the marketdoes not want the risk then why should you?

Egnell admits it is hard to have a Plan B and knowwhat is going on in each country: We see manycompanies close to the government who are able todo a lot of lobby work. We do advise to have robustcontingency plans around political violence andsecurity which many companies do have.

Dietz says: If they are involved in long term projectsthey often realise the changing political landscapeswhen it is in the papers. That is already too late andthey will not be getting any cheap cover.

There are about 200 incidentsaround the world similar to the

Ukraine i.e. the local people arenot satised with the balanceof political power. Even thoughthese might not be such acuterisks compared to the Ukraine,there is the potential that theycould escalate..


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Conclusion.

Underwriters are all in agreement: Africa isgrowing and they are willing to help breathelife into the projects that help build the foundationsin countries that have yet to unlock their trueeconomic potential.

Whilst political risk insurance for Africa is not anew product and it is already on most companiesradar, the request timing for a cover is crucial.Based on Aons long term experience, it is vital thatthe investor or developer submits their enquiry tothe market at the bidding phase as even based onpreliminary facts the appetite of the underwriterscan be ascertained. In certain cases underwritersmight be able to give valuable insight as to how theunderlying contract could be optimised in orderto gain further market appetite. On the other handthe investor or developer can obtain non-bindingindications including premium rates which can beadded to budgets and quotations. Furthermore,the investor or developer might face the necessityto submit sureties & bonds i.e. bid or performancebonds. Aon can support market participants tond adequate solutions for this. In addition to thebonds itself a product called fair & unfair callingof bonds should be sought, as in the past severalclaims have occurred based on the fact that bondswithout proper due dates can be drawn in awrongful fact even after projects have expired.

All underwriters have pointed out that each andevery project is assessed based on its own merits.It is therefore vital to understand the underlyingproject structure and how it is going to be nanced.The underwriter needs to understand how the

stand-alone project ts into the whole complexlandscape. In the underwriting process thefollowing questions are usually raised. Who are theparties that will benet from the project, how arethe prices of the tariffs xed, how realistic are theseprices, how are the local people involved in theproject, how many new jobs are created and mostimportantly what is the previous experience of theexporter/investor with similar projects in the regionor in that specic country. The less experience thecompany has the more vital it is to have sound

advisors and brokers involved.

It should also be pointed out that there will alwaysbe an entrepreneurial risk the company will bearwhen entering this region. Thus the onus is alsoon the company to evaluate if it is happy to investmoney there. Whilst some insurers might beuncomfortable offering cover for certain projectsin this region under current political situations,prudent risk mapping and management can helpunderwriters take comfort in writing very nicheand bespoke solutions e.g. special pre-shipment-

solutions for sub-contractors in connection with anECA-cover.

The majority of underwriters interviewed statedthat whilst some major multinational companieshave the means to monitor political risk smallerand maybe less experienced companies do not.This means that it is even more vital for the smalland mid-sized companies to engage experts tounderstand the exposure to political risks and hownegligence can have critical impacts on any size ofproject.


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With Special thanks to

Atradius Credit Insurance N.V.Thomas DietzHead of Global and Special Productsfor Central and Eastern Europe

The African Trade Insurance Agency(ATI)Jef Vincent

Chief Underwriting Officer

Aon-COFCO Insurance Brokers Co., Ltd. William PuExecutive Director & National Practice Leader -Trade Credit

Garant Versicherungs-AG Dmitry LokshinMember of the Managing Board

Lancashire Christopher WilkinsonDeputy Head of Political Risk, War and Terrorism

Leonardo Pinto Credit Risk and Insurance Consultant

Liberty Paris Alexandre EgnellGlobal Financial Risks

Multilateral Investment Guarantee Agency (MIGA) Antonio BarbalhoGlobal Head of Energy & Extractive Industries

The Islamic Corporation for theInsurance of Investment and ExportCredit (ICIEC) Dr. Khalid KhalafallaLead Underwriter of Investment InsuranceBusiness

KILN Werner RichterRegional Head of Credit, Surety and Special

Risk of Kiln Europe S.A.


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Aon Political Risk White Paper_2014

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