Looking Back and Looking Forward: The Future of the Political Risk Insurance Industry
market will be loosened. Tobin expected some easing of the tenors and conditions imposed by reinsurers by 2005. With fewer reinsurers, however, there may be a reinsurance focus on providing coverage to only the best direct underwriters. Dusting off his crystal ball, Tobin was of the view that capacity among private insurers will come back, FDI and international lending will increase, political risk investment insurance demand will increase, and overall risk factors in emerging markets will look better. Given these trends, Tobin noted three areas of concern: 1. The concentration of coverages in the “Big Five” countries has caused capacity problems that the industry needs to address. The need to improve the spread of risk across countries has become more important. 2. The need to plan for more coverage of infrastructure projects is clear. Private insurers need to overcome their wariness about this sector while avoiding the pitfalls of the past. 3. Private insurers need to look at demand in a wider range of countries. Working with public insurers may be a prerequisite to doing so. Private, specialist insurers have carved out a permanent niche for themselves in providing coverage through the insurance cycle. That said, Tobin acknowledged that in the past insurers and insureds have had differences of opinion over what was covered and not covered. It is vital, he asserted, that insureds know what they are buying and that insurers are clear as to what is covered and what is not covered. Although investment risks can be complex, the uncertainty in insurance products must be reduced before deals are done. Given that contractual exposure to investment risks is unlikely to fall, insurers need to appraise and price these exposures appropriately. Tobin noted that the political risk market went through turbulent times in the 2001–04 period and survived in reasonably good shape. He concluded by noting XL’s commitment to publicprivate partnerships and his cautious optimism about the future. Reflections XL Insurance subsequently exited the political risk investment insurance market, both as a direct underwriter through their Lloyd’s syndicate in 2007 and as a partner with ACE in Sovereign. The ostensible reason was a change of strategy in what they wanted to offer and how they wanted to provide it. Tobin was accurate in his projection that capacity would return (despite XL’s withdrawal). It is interesting that despite substantial credit claims paid over the past two years by many insurers, political risk investment insurance capacity has remained relatively stable. Insurers seem to have become more conservative about what to cover and are less likely to use their full limits or maximum tenors. Tobin’s predictions that FDI, international lending, and demand for political risk investment insurance would increase were correct in the short term, but
87