Uninsurable risks: Fact or fiction
September 22, 2014
The complexities of insuring some of businesses' most complicated risks.
Is it possible for risks to be uninsurable?
Earlier this month, our friends at Risk & Insurance answered yes. In their article, Top Five Uninsurable Risks, the top five — reputational risk, regulatory risk, trade secret risk, political risk, and pandemic risk, have complexities and nuances that, according to the article, make it impossible for risk managers to find total coverage.
This sparked an internal discussion at Zurich surrounding political risk.
The political risk market evolved and expanded in the last few decades and there are many more coverages available now than in the past that can be tailored to an individual firm’s concerns. However, even with the broadened coverage now available, risk managers still need to be clear that political risk insurance is only one tool in the toolbox of country risk management strategy. But, it’s an important tool.
Political risk insurance was never designed to address all of the risks firms encounter in emerging markets. It was designed rather to mitigate some of the more extreme risks caused by events beyond the control of the insured — those that are the least predictable and can have the most catastrophic effects on an investment.
Following World War II, the United States launched the Marshall Plan to help rebuild Europe and needed the means to encourage private investment. One tool the U.S. government created toward this end was political risk insurance with three fundamental perils in mind: expropriation (the host government’s taking of an investment without compensation to the investor), political violence (war, civil war, sabotage, unrest), and currency inconvertibility (the host government’s blockage of the ability to convert local currency and transfer the resulting hard currency offshore). Later, the risks of non-payment by government entities became part of the insurable political risk world, and the private sector took on the challenge of offering all of these coverages.
Political risk losses have become more frequent in the years since the global financial crisis. Some of those losses arose from expropriations in Venezuela and Argentina, political violence in Ukraine, the Middle East, and North Africa, currency inconvertibility in Venezuela, and government entity non-payment in Vietnam and Argentina. Like the Russian actions in Ukraine or the rapid spread of the Arab Spring, political events have gone far beyond what most experts predicted — a cautionary tale for risk managers looking at their emerging market exposures in general.
The world has become more prone to extreme events that arise from unforeseen angles. Experts have difficulty predicting global risks because there are so many variables operating in an interconnected way at too high of a speed. As a result, there isn’t one tool to protect firms from all of these risks. Risks are complex, and thankfully insurance, including political risk insurance, can evolve to cover firms against some of the most perilous events.
To answer the question posed at the beginning of this article, it certainly is possible for certain risks to be uninsurable. But, political risks defined as expropriation, political violence, currency inconvertibility, and government entity non-payment are not among the uninsurable.