Political Risk / Trade Credit
The Political Risk / Trade Credit market has faced headwinds over the last few years; from volatile commodity prices to the Covid pandemic and the Russia/Ukraine crisis. Market capacity for both political risk and contract risk varies significantly based on the risk location, the perils covered and the strength of the insured.
We work extensively with our clients to help them navigate the changes in the market’s appetite and capacity, as well as identifying how we can best use market conditions to their advantage.
Most insurers have now secured their reinsurance for the next 12 months. Reinsurance premium costs have remained quite flat - which is good news for insurers and insureds – but insurers’ retentions have generally increased, which is likely to push some markets to move higher-up the credit curve to help better manage their net exposures.
We have seen an increased requirement for larger self-insured retentions for new clients to help ensure a better alignment of interests, especially for more challenging risks with counterparty credit risks lower down the credit curve (or in challenging jurisdictions).
Most of the appetite for counterparty credit risk remains around the S&P BB (or equivalent) or higher level, unless there is a strong security package, high level of retention by the insured and / or a long trading history between an insured and their client. In the absence of this, insurers tend to limit their support to key clients with whom they have had good experience of working through difficult problems.
For upstream projects in the Energy sector there has been a reinforced focus on an operation’s cash / production and all-in costs, to help ensure they have a sufficient cash vs OPEX buffer to manage volatile commodity prices. This has been a particular concern for single asset operations that are not only exposed to commodity price movements but also unforeseen operational issues.
We are a strong advocate of clients taking a long-term approach to the insurance market, by not just seeing insurers as a secondary route of repayment (following a problem) and rather working problems out with them, and this continues to be one the most effective ways to use the insurance market in this class.
Several markets were put into run-off 3-5 years ago following poor underwriting results in credit which resulted in an increased scrutiny over their business plans and underwriting parameters (including focusing on counterparties higher up the credit curve). Despite this, we have not seen any reduction in overall market capacity, and, to the contrary, there have been several new entrants in this sector that has increased capacity, but insurers’ emphasis continues to be on more conservative risks.
For project risks, appetite for upstream Oil and Gas operations projects remain quite high but with a focus on OPEX given the recent volatility in crude prices.
There is much less appetite for multi-country political risk placements due to the number of losses suffered under these placements and them being historically under-priced, so we would encourage new clients to focus on insuring their keys assets
Insurer appetite for Oil and Gas exposures remains strong, despite some markets being restricted due to their internal ESG policies. To satisfy those internal policies, we have also seen an increase in appetite to insure ESG credible risks (specifically renewable energy projects), but only where the operations make commercial sense. Insurers are increasingly more restricted on covering coal related contract risks. Most insurers are now unable to cover prepayments for thermal coal and there is only a limited number of markets able to cover prepayments to metallurgical coals producers. There is less appetite to insure risks that involve multi-country political risk placements where cover includes breach of investment agreement or operating licence cancellation.
Insurers are increasingly focused on the reputation, experience and financial strength of the insured party when considering underwriting risk. We are seeing more cases where insurers will only cover country party credit risk for entities with a credit rating equivalent to BB or above (S&P).
Credit line sizes are decreasing for non-investment grade credit risks, but insurers are willing to move lower down the credit curve based on structure / security, experience and reputation of the organisation.
In terms of restricted territories, insurers require policy exclusion and Office of Financial Sanctions Implementation (OFSI) approved attestation documents for cargoes originating from Belarus, Ukraine and Russia.
For new insured parties, insurers are imposing increased self-insured retentions, especially for contract risk in challenging jurisdictions to help ensure a better alignment of interests.
There has been an increase in reinsurance pricing, and we have seen that this is being passed on the direct insured organisations. Especially for non-investment grade credit risks (where overall performance has been quite poor for the credit market).
Getting the most from the market
We differentiate ourselves from other broking houses through our extensive experience, our face-to-face broking approach, the team’s market knowledge and, importantly, working closely with our clients to prepare their submissions to get the best results in what is a challenging environment.
Senior members of the team are directly involved with our clients. They handle the client relationship as well as day-to-day activities, which means that the people negotiating our clients' business with insurers are those who understand your operations best.
Our face-to-face broking approach is one of the key factors in our clients’ success, placing challenging business into the market.
With around 60 insurers who can potentially be approached for credit and political risk enquiries, we have a deep understanding of different market appetites which allows us to take a strategic approach to broking our clients’ business.
We adopt an approach to pre-underwrite enquiries to get the best results for difficult risks based on our knowledge of what information is needed by insurers at the outset.