POLITICAL RISK INSURANCE: PROTECTING BUSINESS INVESTMENTS ALONG - - PowerPoint PPT Presentation

POLITICAL RISK INSURANCE:

PROTECTING BUSINESS INVESTMENTS ALONG THE BELT & ROAD

JARDINE LLOYD THOMPSON LIMITED 5 June 2018

JARDINE LLOYD THOMPSON LIMITED 2

PROTECTING BUSINESS INVESTMENTS ALONG THE BELT & ROAD

AGENDA

• About JLT
• Belt & Road Initiative (“BRI”) Overview
• Business Opportunities
• Underlying Risks
• Why purchase Credit & Political Risk Insurance
• Types of Insurance Policies
• Key Countries & Sectors
• Insurer’s Risk Perspective
• Claims in APAC

3

THE JARDINE MATHESON GROUP

JLT is an Associate Company of Jardine Matheson Group, an Asia-based conglomerate with a broad portfolio of market-leading businesses in engineering, construction, transport services, motor trading, property, retailing, restaurants and hotels. JLT is a leading specialty insurance broker listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.

JARDINE LLOYD THOMPSON LIMITED The Jardine Matheson Group also includes Jardine Pacific and Jardine Strategic, which are holding companies.

4

ABOUT JARDINE LLOYD THOMPSON

Market Expertise

• We are a market-leading Credit, Political & Security Risks (CPS) team.

Market Track-Record

• Founded in 1986, the CPS team has a longstanding and proven track record both managing

transactions and in claims handling.

Market Leverage

• We handle insurance capacity of approx. USD 80bn at any one time.

Global Reach

• 180 specialists in 16 international hubs of expertise.

JARDINE LLOYD THOMPSON LIMITED

5

BELT & ROAD INITIATIVE (“BRI”) OVERVIEW

• Silk Road Economic Belt
• Maritime Silk Road
• USD 4 trillion initiative
• 65 countries
• Asia, Europe, Africa and Middle East

JARDINE LLOYD THOMPSON LIMITED

6

BELT & ROAD INITIATIVE MAP

JARDINE LLOYD THOMPSON LIMITED

7

8

BUSINESS OPPORTUNITIES

Key Business Opportunities

• Infrastructure Development
• Mergers and Acquisitions
• New consumer markets

Opportunities for Hong Kong

• Financial Services
• Estimated USD 750mil funding shortfall for

Asian Infrastructure projects a year through 2020

• Hong Kong as a key international finance

hub – mobilize private funding

• Insurance

JARDINE LLOYD THOMPSON LIMITED

Investment Opportunities

• World class infrastructure/services companies
• Property development, telecoms,

transportation, port services, aviation etc.

New markets

• BRI will encourage trade with markets having

increased appetite for consumer goods

• Hong Kong stands to benefit as a key trading

hub (telco equipment, electronics, precious stones/metals etc.)

JARDINE LLOYD THOMPSON LIMITED 9

UNDERLYING RISKS

• Late or non-payment by buyer
• Contractual Disputes
• Expropriation by government authorities of assets
• Change in law/regulations (Contract Frustration)
• Political Unrest (damage to property / project abandonment)
• Currency Inconvertibility / Non-transfer
• Non-honouring of Arbitration Award

JARDINE LLOYD THOMPSON LIMITED 10

UNDERLYING RISKS

• Cash flow problems
• Balance sheet loss
• Bankruptcy

IMPACT TO BUSINESSES

11

WHY PURCHASE CREDIT & POLITICAL RISK INSURANCE

Corporates and Traders

• Obtain bank financing on the transaction and reduce the cost of financing the transaction by using

insurance as security.

Banks

• Obtain Basel II / III compliant insurance policies.

Removing barriers to entry

• Expanding your business to new emerging markets while offsetting the higher country risks with globally

recognised insurers.

Increased confidence

• Protecting your balance sheet when trading in higher risk territories.

JARDINE LLOYD THOMPSON LIMITED

12

TYPES OF INSURANCE POLICIES

Applicable to

• Wide range of financial obligations like short term trade loans, asset backed financing, project financing,

pre-export financing, working capital financing, etc.

Trigger of Loss

• Buyer / borrower’s failure to meet payment / delivery / debt obligations for any reason.

Tailored policy wording to suit the needs of the Insured

Credit insurance is widely used by banks and exporters as

• It provides security against non-payment of loans or sales and purchase agreements.
• Basel compliant insurance policies reduce the amount of regulatory capital that banks are required to

hold in respect of the transaction.

Policy Tenors: ranging from 12 months to up to 10 years Used to cover risks in both emerging and OECD countries

JARDINE LLOYD THOMPSON LIMITED

CREDIT INSURANCE

13

TYPES OF INSURANCE POLICIES

Applicable to

• Trade, commodity and structured finance
• Project Finance

Trigger of Loss

• A counterparty / borrower’s failure to meet payment / delivery / debt obligations for any reason
• Counterparty / borrower = Stated-owned Enterprise

Perils that can be covered

• Government Buyer or Guarantor non-payment
• Government Supplier Non-performance
• Government Frustration of Contract
• Confiscation / Deprivation
• War / Political Violence
• Currency Inconvertibility and Non-Transfer
• Unfair / Politically Unfair Calling of Bonds

Policy Tenors: ranging from 12 months to up to 15 years

JARDINE LLOYD THOMPSON LIMITED

CONTRACT FRUSTRATION (CF) INSURANCE

14

TYPES OF INSURANCE POLICIES

Applicable to banks / investors transacting in foreign countries (cross border element required) where they are not comfortable with the country risk aspect of the transaction Trigger of Loss

• An occurrence of a political risk event (named as a peril under the policy) that leads to a loss to

the bank / investor

Named Perils

• Confiscation, Expropriation, Nationalisation and Deprivation
• Currency Inconvertibility and Transfer Risk
• Political Violence
• Non-honouring of an arbitration award by a government entity

Policy Tenors: ranging from 12 months to up to 15 years Other features:

• Insured Percentage:

Up to 100%

• Claims Waiting Period:

180 days

JARDINE LLOYD THOMPSON LIMITED

POLITICAL RISK INSURANCE

15

KEY COUNTRIES & SECTORS

Common enquiries

• Bangladesh, Pakistan, Sri Lanka, Laos, Vietnam & Indonesia.

Key sectors

• Energy & Power, Infrastructure, Telecommunications & Ports

Typical risks

• Terrorism
• Sovereign Credit Risk
• Contract Repudiation
• Legal & Regulatory changes.

JARDINE LLOYD THOMPSON LIMITED

16

INSURER’S RISK PERSPECTIVE

How do Insurers assess projects?

• Insurers’ appetite for BRI-related projects vary according on the country, sector and transaction

structure.

• The strategic importance of a sector to a country would influence the premium pricing.

For example, power, energy infrastructure and manufacturing projects are considered to be of higher strategic value in Bangladesh.

• Location of the project also affects insurance capacity & appetite. For example, insurers may be willing

to offer mobile asset cover for certain locations in Kurdistan in Northern Iraq but not Baghdad.

• Transaction structure – projects which will generate revenue in local currency is less popular with

insurers as this brings a higher risk of currency inconvertibility / non-transfer issues.

JARDINE LLOYD THOMPSON LIMITED

17

CASE STUDY 1

Sector: Commodity Trader Country of Risk: Ukraine Policy: Political Risk Insurance – Equity Form Background:

• A global commodity trader and supply chain

manager suffered a claim in Ukraine as a result of the fighting with Russia. Two of the Insured’s grain silos which each contained 5,000 metric tons of wheat were destroyed in an explosion.

• Due to the ongoing security situation in the

area, the loss adjuster could not do a site survey of the damage.

• It was later found that the explosion hit

Warehouse 1 and strong winds caused the fire to spread to Warehouse 2.

JARDINE LLOYD THOMPSON LIMITED

Challenges:

• There was inaccuracy of the Insured’s monthly declarations, due to

the fact they had not been declaring the value of third party wheat which they stored in their warehouses and were therefore contractually liable for.

• The Insured also made an investment in 2012 which increased the

value of the storage complex to USD 5.6m but its financials did not include this.

• The loss amount initially assessed by the loss adjuster was thus
• nly USD 2m, which was less than the costs presented by the

Insured. Resolution:

• JLT negotiated & persuaded Insurers that the third party wheat was

under the Insured’s “care, custody and control” and they were liable to the owners for the damage that was caused.

• No specific site inspection has been possible but Insurers have

accepted that the real value of the assets was USD 5.6m and have agreed subject to them receiving proof of the costs for the repair they will reimburse the Insured up to this level.

18

CASE STUDY 2

Sector: Engineering & Industrial Country of Risk: Russia Policy: Contract Frustration Background:

• A European exporter signed a USD 7.5m contract

to design, build and deliver a nitric acid plant to a Middle Eastern country. The Buyer is state owned and the Ministry of Finance provided a guarantee in support of the deal. The contract was governed by local law.

• When the first shipment was due to be

transported, the Insured applied for an export

• licence. Part of the equipment to be delivered

was a 4m metal pipe with a diameter of 30cm, and the authorities denied the export licence as they alleged that this barrel could be used in a device for weapons of mass destruction.

• A loss was filed for USD 1.65m, comprising of

material costs of USD 1m, design costs of USD 500k and a pre-agreed 10% nett loss of profit of USD 150k.

• Insurers agreed to pay the claim of USD 1.35m

(being 90% indemnity of the loss).

JARDINE LLOYD THOMPSON LIMITED

Challenges:

• As the Insured wanted to receive the claims compensation urgently,

they agreed to the terms in the Settlement Agreement which gave Insurers the right to first recoveries from any payment received by the Insured’s government as a result of their denial of the export licence.

• Although JLT advised strongly that we should negotiate for a pro-rata

sharing of recoveries, the Insured decided to sign the Settlement Agreement without further changes.

• The Buyer subsequently sued the Insured for breaching the contract &

being subject to local law, the Insured lost this litigation. The Insured had to compensate the Buyer a sum of USD 5m.

• The Insured contacted their own government for reimbursement and

after a lengthy debate, their government agreed to compensate USD 3m on a ex-gratia basis.

• Per the terms of the Settlement Agreement, the Insured had to remit

USD 1.35m to the Insurer & only received USD 1.65m for their own account.

• Had the sharing of recoveries been on a pro-rata basis, the total loss

amount would have been revised to USD 6.65m (USD 5m compensation to Buyer + USD 1.65m for pre-shipment loss under the contract). The Insurer’s pro-rata share would be 20.3% (being USD 1.35m / USD 6.65m), and the Insurer would only receive USD 609,000

• f the USD 3m ex-grata compensation from the Insured’s government

while the Insured gets to keep USD 2.391m.

19

CLAIMS IN APAC

Surge in claims in 2015 – 2017 Highest level of claims to date since the Asian Financial Crisis in 1997

Reported / Pending / Paid

• Political Risk Insurance: USD 225-300mil
• Credit Insurance: USD 450 – 600mil

Insurance market responded well and most claims are settled within policy terms

JARDINE LLOYD THOMPSON LIMITED

QUESTIONS?

CONTACT INFORMATION

Koh Wei Jun Assistant Director – Credit, Political and Security Risks +852 2864 5336 Weijun_koh@jltasia.com

Jardine Lloyd Thompson Limited 5th Floor, Cityplaza Four 12 Taikoo Wan Road Taikoo Shing, Island East Hong Kong T : +852 2864 5333 F : +852 2861 2758 asia.jlt.com