In a lively panel discussion with plenty of input from the floor, JLT Specialty and legal firm Trinity International LLP threw some light on the political risk insurance (PRI) options available to developers and financiers of large power projects.
The default option for cover tends to be the Multilateral Investment Guarantee Agency (MIGA), which is a member of the World Bank Group, or public bodies such as the Overseas Private Investment Corporation (OPIC), which is a US state-sponsored development finance institution.
The private market is rarely the first port of call and often it is not even on the radar. A straw poll on the day supported this view and found a sizeable majority of delegates had practical experience of using multilateral insurers such as MIGA, and that only a comparable minority had ever used the private market.
The private PRI market has evolved significantly since the first policies were issued over 30 years ago. In the last 15 years alone, the number of carriers has tripled from 20 to around 60 and theoretically if every one of the 60 insurers is able to offer their full limit for an enquiry they could provide a total capacity per inquiry of $3bn.
The growing number of insurers creates significant choice for power project developers and financiers and the increasingly competitive market has driven down costs and expanded the scope of cover available.
Panel members were keen to point out that placing a PRI programme is not a straight choice between the public or private market. Cover from one can complement the other, while there are advantages of using different markets for different stages of a project.
For example, developers are funding more power projects on an equity-only basis to get the deals away quickly. Once they complete the construction phase and commercial operations begin, they are then refinancing the deal.
The speed of response offered by the private PRI market allows it to work within the time constraints of the initial phase, and once cover is in place, developers can negotiate insurance from a multilateral carrier as part of the refinancing arrangement. Using each market to best effect ensures developers get the cover they need in the timeframes required.
Similarly, a joint-market PRI programme can deliver the best of what both markets have to offer. Private market credit risk policies will pay out more quickly when triggered, safeguarding a developer’s cash flow. The involvement of a public carrier such as MIGA will see it communicate directly with the local government, outlining its role in protecting the asset, project or transaction, and leveraging its influence to avoid problems in the first place. This two-pronged approach is very effective for developers in both mitigating and transferring their risks.
Private market appetite
Despite the significant growth of the private market over the last 30 years, there are still many preconceived ideas about the price and availability of cover.
One comment from the floor summed things up: “I guess I am struggling to believe that the private market will provide insurance for the non-honouring of financial obligations that pays out if an unrated government does not pay out.”
In short, it does and as a panel member replied: “The private market has been doing this for 30 years and has got the bruises to show for it.”
Cover may be restricted depending on the territory, current geopolitical situation, and the structure of a project, but there are very few territories where it is not available and in the main these are countries under international sanctions and/or embargoes.
For developers and financiers exploring private market options, minimal upfront input is required to get indicative information on cover availability and pricing. Something similar to an investors’ memorandum that details the project, its structure, its tenor and the amounts and parties involved, is enough to get discussions started.
The private PRI market has a proven claims payment history that underpins its policies. According to figures from Lloyd’s for 1997 to 2017, three categories of political risk claim accounted for 98% of the total $3.9bn paid out by insurers.
Credit losses accounted for 49% of losses, then came contract frustration at 31%, while political risks made up 18% of the total.
In the last 10 years – 2007 to 2017 – Lloyd’s received a total of 436 claims. Of these, 421 (97%) were paid in full and 15 (3%) received compromised settlements. The compromised settlements were all due to non-fulfilment of policy terms and/or obligations by the insured and on average were settled at 44% of the amount claimed.
While the first thought is often that PRI claims arise from acts of war and/or terrorism, the reality is that credit claims generate the biggest losses by far. Bespoke wording and cover options from the private market can ensure these losses are effectively covered.
Private market PRI might not be as well-understood as its public market cousin, but as the panel discussion proved, it has a huge amount to offer developers and financiers in managing and mitigating their power project risks.
At a glance - pros and cons of private market and MIGA
Private market pros
- Speed of response
- Spread of risk
- Commercially negotiated contract
- Insurer ratings A+ - AA
- Developed market with proven claims payment history, utilised by the world’s leading financial institutions and corporations
Private market cons
- Comparatively shorter tenors. Up to 15 years, but for most deals realistically 7-10-year limit
- Capacity limited for countries/projects by supply and demand factors
- Not as politically influential as an export credit agency or multilateral
- Leverage of the World Bank in recovery situation, post loss
- Long contract tenors available
- Ability to take on very large deals under one policy
- Exclusionary language in the policy wording broader than private market
- Long lead time to provide feedback reliant on multiple studies making an affirmative statement in order to issue cover
- Upfront engagement cost
TALK TO AN EXPERT
If you would like to talk about any of the issues raised in our panel discussion, please contact Bob Lock, Partner, Power and Renewable Energy on +44 (0)20 7528 4289