PRI Players Discuss the Industry in Light of Current Financial Crisis

The 2008 biannual “MIGA-Georgetown Symposium on International Political Risk Management” brought together leading industry players to assess the current state of the industry and consider cutting edge needs and capabilities, especially in the face of the current global financial crisis.  MIGA’s new Executive Vice president Izumi Kobayashi urged those gathered to think creatively about the issues confronting the industry today and to play their part in helping prevent foreign direct investment from grinding to a halt during challenging times. “We are in the midst of an unprecedented crisis, with critical issues confronting the industry.”

“We are in the midst of an unprecedented crisis, with critical issues confronting the industry,” said Izumi Kobayashi, MIGA’s Executive Vice President. 

Senior practitioners from the corporate, financial, insurer, broker, rating, and legal communities of the political risk insurance industry (PRI) gathered at the one-day event raised questions and some concerns about the long-term impact of the crisis.  They did agree the crisis presents both challenges and opportunities for the PRI industry.

A number of those gathered noted the perception of political risk is up and some insurers are seeing increased demand for PRI as well as decreased portfolio run-off. However, they also noted that with financing drying up, a lot of projects are being shelved – particularly large project finance deals – and this has the potential to lead to decreased demand for PRI.

In her opening remarks at the December 4th event, Kobayashi reflected on the industry’s history. “Over the last 20 years, there has been tremendous growth in both the number and value of projects which have been insured, and a steady and healthy increase in the number of PRI providers in the market place. MIGA, for one, has written over twenty billion dollars in guarantees.”

Emerging Challenges

The conference was aptly themed “Navigating in a New World.” While the financial crisis weighed heavily, a variety of issues critical to the industry were debated including the enforcement of arbitration awards, evolving centers of influence, varying interpretations of expropriation, and the pricing of PRI.

“Political risk, even the perception of political risk, has a knock-on effect for FDI,” observed James Bond, MIGA’s Chief Operating Officer. 

A representative of the mining industry challenged insurers to consider the impact of trends he has observed. “For large multinational resources companies, risks of a non-commercial nature have evolved rather substantially in the last five years.” He noted the risks inherent with formal devolution of political power from national governments to local or regional governments. But particularly relevant to his industry was the growing power of special interests and their increased ability to disrupt operations. “In these cases, often the national government – which you believe had on some level committed to support your investment – is conspicuously absent.”

Defining expropriation remains a challenge and a subject of lively debate in the industry. Delegates noted that governments are becoming increasingly sophisticated in the selective application of their regulatory authority. A government, for example, may apply immigration policies that prevent key project staff from entering the country. While this may disrupt a project, it doesn’t fall under the classic definition of expropriation. Panelists urged the industry to define expropriation in a way that is “modern, flexible, and appropriate.”

Helping to Keep FDI Flowing

The symposium included discussion on the overall need to keep FDI flowing to the developing world, especially to countries that need it most.  Delegates commented that emerging sources of financing, including Islamic finance and sovereign wealth funds, could help fill the void created by the current financial crisis. Dr. Abdel-Rahman Taha of the Islamic Corporation for the Insurance of Investments and Export Credit (ICIEC) chaired a panel that considered how PRI providers can play a role in backing Islamic finance deals. MIGA’s recent collaboration with ICIEC in supporting the Doraleh Container Terminal project was recognized as a groundbreaking customization of PRI cover for an investment supported by an Islamic financing structure.

While governments and institutions consider new sources of FDI to help developing countries retain the gains in growth they’ve achieved, the role of insurers as catalysts for FDI is ever more critical. James Bond, MIGA’s Chief Operating Officer, observed there is a perception that “risk has returned with a vengeance”. “Political risk, even the perception of political risk, has a knock-on effect for FDI.   He said that investors want PRI and can afford to pay for it.  “It’s a riskier world—we price for it.”

Kobayashi observed the important role for political risk insurers to help support developing markets.  “By helping to catalyze new investment that has an impact on people’s lives they demonstrate that non-commercial risk, while heightened, is still manageable.”

Dr. Adbel-Rahman Taha of ICIEC with MIGA’s Kobayashi and Bond.