Looking Back and Looking Forward: The Future of the Political Risk Insurance Industry
Public sector political risk insurers face a particular challenge in dealing with the periodic upheaval of their top management as a result of changes in administrations. It is rare that the new leadership has any experience in the insurance industry, or perhaps even in international business. This situation places an enormous burden on the senior civil servants to successfully communicate the esoteric nature of the political risk investment insurance business and to cooperate in bringing the new management up to speed. In parallel fashion, there is an enormous need for the new political leadership to have initial confidence in the existing managers and to learn the business quickly. If there is failure in either case, stagnation or decline is likely. In the short term, there are obviously specific actions that must be taken within each political risk investment insurer to address specific shortcomings previously identified. These actions may take place in recruitment, training, marketing, underwriting, or management. Because of the uniqueness of these actions to each organization, they are impossible to identify in a paper such as this. However, there are some generic short-term actions that can be described. Reactive versus Proactive Mindset Many previous symposium participants have pointed with pride to the industry’s history of reactive adaptation to new challenges, including the swift development of a stand-alone terrorism coverage and their ability to “stretch” some existing coverages into novel new uses. A certain behavioral mode of insurers responding to brokers and buyers that push for a new application of traditional coverages to new circumstances has become the norm. However, there is a “dark side” to this mindset. It is considered “normal” to be reactive. Many insurers lack a proactive tradition of investing in research and new product development in anticipation of fulfilling investor needs. This proactive mindset is not an alternative to the reactive mode, but an addition to it. Therefore, it is useful to retrospectively ask questions: Was the industry response to Basel II prompt and adequate? Could the industry have better anticipated the needs of investors? Then one is better positioned to address the question: What should the industry do to better respond to the opportunities created by Basel III? Opportunities abound for more tailored political risk investment insurance coverages for certain sectors. One need not be an international economist to know that oil and gas exploration and development is a sector that has attracted and will continue to attract a great deal of investment in emerging markets over the next decade. Why has so little of this investment been covered by political risk insurers historically? Is it because the insurers have not invested in the development of appropriate contract language? The same can be said of intellectual property rights coverages, which have intermittently been explored by a few insurers over the past 20 years, but have not yet yielded an appealing product. The point is that a less reactive and more proactive mindset is likely to open new avenues for growth for insurers who are willing to devote the staff time to develop new applications of traditional products.
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