RI political risk cover evaporates
RI political risk cover evaporates
SINGAPORE (Reuters): Political risk to business deals is at its height in crisis-hit Indonesia, but insurance cover for exposure to it has vanished in the wake of economic and social turmoil that led to the ouster of its former president.
Capacity for new risks began to dry up when Indonesia called late last year for a US$41.2 billion dollar bailout from the International Monetary Fund, and had almost entirely evaporated by the time President B.J. Habibie replaced Soeharto two weeks ago.
"It is impossible to place an Indonesian risk now. It's like asking the market to insure a horse that has already bolted," said one senior market figure who declined to be identified.
Political risk underwriters have dropped the country like a hot coal, afraid of getting more burnt than they already are, and rates among the few players still offering capacity have risen 10-fold in a month, market sources said.
No one in the world's insurance market is sure how big a bill the industry faces from its Indonesian exposures, either on standard property risks or the more complex political portfolio, but the claims are set to roll in.
"Absolutely underwriters will be facing claims," Paul Torrington, a director of London-based political risk insurance broker, Berry Palmer & Lyle told Reuters.
Initial claims estimates of about $200 million were made for property damage caused in Jakarta's recent bloody riots.
But these costs are entirely separate from any business interruption losses -- which could double the US$200 million figure -- or from claims that might be made against policies protecting contract frustration or expropriation.
The billions of dollars at risk in suspended infrastructure projects in Indonesia presents the biggest unknown factor.
About 150 projects worth some $37 billion are on hold or under review. Many have private sector covers, others have been underwritten by government export agencies or credit insurers. But a considerable number have no cover at all.
"A lot of companies have not insured their Far East risks because they didn't consider them to be at risk two or three years ago when project negotiations started," Torrington said.
However, most major corporations in the world have at least some investment in and consequent exposure to Indonesia. They have sophisticated risk transfer programs in place, so some cost is bound to filter through to insurers.
"I think there is every reason to suspect that because of the scale of the economic problems in Indonesia there could easily be more political strife," one insurance source said.
The private sector political risk insurance market is a very close-knit community based mainly in Lloyd's of London.
Other players include U.S.-based AIG, France's Coface and Euler and Bermuda-based Sovereign Risk.
Covers take several main forms based on investment, contract frustration and credit risks and capacity runs into billions, generally available for contracts of up to 10 years.
On infrastructure deals where contract terms of up to 20 years are the norm, government insurers like the United States' Overseas Private Investment Corp (Opic) are the biggest players and face the biggest exposure.
Washington-based Opic underwrites projects in about 140 emerging market countries of the world and insured fresh deals in the Asia-Pacific region to the tune of US$465 million in 1997 and about US$1.1 billion in 1996.
About US$470 million of 1996's insurance was issued to power projects in Indonesia, the sector that now is arguably the most carefully scrutinized of Indonesia's infrastructure areas.
"I wouldn't be surprised if Opic had very considerable exposure to these types of risks," said one London market insurance source who declined to be identified.
An Opic spokeswoman said it was talking to clients doing business in Indonesian and while it had not yet booked a claim, "Opic is not entering into any new contracts" there.
Interestingly, if Opic does pay a claim, it will seek to recover its outlay from the Indonesian government.
"A mainstay of our program is the ability to seek recompense from governments where projects have been expropriated," the spokeswoman said, adding that recovery rates are more than 100 percent -- when interest on claims is included.
"I would have thought that (position) creates some diplomatic tensions given that the U.S. wants the IMF reforms and by going ahead with reforms, Indonesia is going to create a liability to the U.S. government," said Bruce Gale of the Political and Economic Risk Consultancy in Singapore.
Politics are likely to be a major factor influencing claims, both government to government and company to company as it is still unclear which projects were shelved permanently or temporarily, or which are covered by insurance.
"It's going to take years before any claims are paid," said one U.S. energy company executive in Indonesia, adding that firms keen to restart suspended projects would hold off lodging claims in the hope of getting them revived.
Meanwhile insurers anxiously await developments, with most keenly watching moves related to the Soeharto clan's business empire and investigations into deals linked to the old regime.
If massive contracts now on hold are deemed to have been made illegally, insurance cover on them would be invalidated.
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