Political risk and trade credit

Published on 08 January 2020

In this chapter of our Annual Insurance Review 2020, we look at the main developments in 2019 and expected issues in 2020 for political risk and trade credit.

Key developments in 2019

2019 has seen an increasing shift in the geo-political landscape. Traditional alliances have been stretched, arguably to a greater extent than at any point since the second-world war. 

Turkey's incursion into Syria in October 2019 was decried by its NATO allies, although Turkey's actions are reported to have been predicated on a telephone call with the US President. The fall-out from this incursion continues, with Turkey's purchase of the S-400 surface to air missile system from Russia perhaps signalling a potential willingness to form closer ties with the Putin regime. This is just one example of the shifting sands of international diplomacy. Uncertainty as to the political alliances of a particular state also gives rise to uncertainty as to that State's approach to private investors. These uncertain times can give reason (and headaches) for underwriters to reconsider the rating (and pricing) of country risk in states previously considered not to represent a significant issue from a political risk insurance perspective. 

Similarly, escalating tensions in the Middle-East, including proxy wars in Yemen and Syria, appear to have spilled out into direct attacks on infrastructure. In September 2019, drones were used to attack the state-owned Aramco oil processing facilities in Abqiq and Khyrais in eastern Saudi Arabia. While the Houthi movement in Yemen claimed responsibility – linking the attack to the Saudi-led coalition's intervention in Yemen – Saudi Arabia and the United States asserted that Iran was directly behind the attack. Meanwhile, France, Germany and the UK jointly asserted that Iran bears responsibility for the attack.

This is just a single example of how geo-political factors can significantly impact political risk, war and terrorism cover and/or exclusions. In the Aramco facility scenario, issues such as whether Saudi Arabia is at war with either (i) the Houthis in Yemen and/or (ii) Iran would require consideration, together with whether or not the attack could be considered Terrorism on the basis of its 'standard' definition in many policies. Perhaps regrettably, it is all too easy to see these sorts of issues continuing to trouble claims determinations in the short to medium term.  

What to look out for in 2020

Two significant events are due to take place in 2020 – the UK's long-delayed departure from the European Union (albeit this is still somewhat uncertain) and the US presidential election. Both events have the potential to significantly impact upon the global economy.

While the current (at the time of writing) UK government has negotiated a withdrawal agreement that provides for a transitional period, the deadline in place to agree an EU-UK free trade deal is December 2020. This appears incredibly tight considering the time it normally takes parties to agree such wide-ranging economic treaties. As such, from a UK/EU-domiciled company perspective, the Brexit uncertainty will not stop with departure. In July 2019, UK company insolvencies rose to a five-year high in what the FT described as a 'possible sign of Brexit-related political uncertainty weighing on business'. Given the coming year's likely negotiations, businesses are unlikely to see this uncertainty yield. 

Similarly, the US presidential election has the potential to significantly impact the global economy. The US/China trade war shows no sign of abating and could be used in the context of President Trump's re-election campaign – by achieving a deal to demonstrate the President's oft-touting deal-making abilities or continuing the fight in order to maintain the 'America First' approach. Either way, this also creates financial uncertainty.

Paradoxically for any insurance market, uncertainty is to be avoided if possible. This is especially true of the trade credit market. Financial institutions seeking cover will, naturally, wish to ensure that their own due diligence on obligors is thorough. However, given continuing pressures on insurer protections in wordings, trade credit insurers will likely need to be exceedingly vigilant on the financials and related risk factors of the companies against whom they are taking the credit risk. 

With continued talk of the dark clouds of another financial crash on the horizon, trade credit insurers will want to ensure that their foundations are as secure as possible. Given the above, this could be easier said than done.

Authored by Naomi Vary.

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