Looking Back and Looking Forward: The Future of the Political Risk Insurance Industry
Palmer noted a contrary influence that emerged regarding the experience of investors and lenders in Argentina, where many political risk investment insurance policyholders discovered what was (and was not) covered by their policies. She also noted another demand factor—the emerging importance of Asian investors who are content to self-insure. Palmer’s conclusion with respect to demand is thus mixed—demand has been strengthened by reminders of events that are perils covered by traditional coverage, but there are residual concerns about the relevance of the product (and, by implication, its price) that are affecting the market. Palmer then turned to some investor and lender viewpoints about the market that will shape its future evolution. Although investors are continuing to buy political risk investment insurance against the traditional perils of expropriation, political violence, and transfer and inconvertibility, they are demanding broader coverage from insurers. As a consequence of examining their political risk investment insurance coverage more closely, investors are pressing insurers to stretch their traditional coverage language to better cover investors’ perceived needs. Thus, political violence coverage might be broadened to cover the threat of violence versus the actual loss or to cover temporary loss of income rather than asset damage. With respect to expropriation coverage, Palmer noted that there is pressure to more explicitly cover regulatory risk. Her expectation is that the political risk investment insurance industry will be flexible in its response to such demands—in part because it wishes to remain relevant to its clients’ risk transfer needs and in part because these demands can be accommodated by tweaking existing coverage parameters rather than by shouldering the burdens of developing totally new products. Palmer noted that the recent expansion of political risk investment insurance coverage to insure against the failure of a sovereign or quasi-sovereign to honor an arbitral award (that is, arbitral award default coverage) shows great promise if some details can be worked out. Selective investors will continue to be interested in the protection of multicountry portfolios of investments or assets (that is, a global policy). Although demand for such coverage will likely continue, the pricing of such coverage will remain a problem for both parties. As did John Salinger, Palmer acknowledged that although investor demand for devaluation coverage will continue, it is very unlikely to be addressed by political risk investment insurers. The protection of intellectual property rights is also an area of concern for investors. Palmer (2008, 219) noted that some discussion has taken place within some insurers on the subject and that “it is quite possible a product will emerge in the medium term.” Another unmet investor demand relates to bribery and corruption. Insurers are aware of this interest in a product that adequately protects an investor. Most public insurers have specific exclusions denying liability for such risks rather than covering them. Some investors, however, want protection against being forced to pay bribes to government officials in cases where such actions seem to
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