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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