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p. 4 of 21 BACK | NEXT I. Introduction II. An Overview of the Political Risk Insurance (PRI) Market A. Types of PRI Investment Coverage B. Major Underwriters in the PRI Market C. Premium Rates and Loss Histories of Major PRI Underwriters III. Review of ADB's Partial Risk Guarantee (PRG) Program IV. Recommendation for Changes to ADB's PRG V. Potential Benefits of the Proposed PRJ Program VI. Conclusion

Review of the Partial Risk Guarantee of the Asian Development Bank : II. An Overview of the Political Risk Insurance (PRI) Market

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B. Major Underwriters in the PRI Market

11. Figure 1 provides an overview of the market share of the major institutions in the PRI market. The market is almost evenly divided between public sector institutions such as the Multilateral Investment Guarantee Agency (MIGA) or Overseas Private Investment Corporation (OPIC), and private sector groups such as Lloyd’s of London and American International Group (AIG). Total premia paid in the PRI market in 1998 were estimated at approximately $450 million.⁶ The following sections provide a brief overview of the products and policies of the major participants in the market.

1. Bilateral Institutions

12. Long-term political risk insurance has, until recently, been the domain of the bilateral institutions, which are owned and operated by an individual government.

13. The two largest bilateral providers of PRI in terms of premium generation are Export Insurance Department of the Ministry of International Trade and Industry of Japan, and OPIC of the United States. Other bilateral providers of PRI include Companie Francaise d’Assurance pour le Commerce Exterieur (COFACE) of France, Export Credit Guarantee Department (ECGD) of the United Kingdom (UK), Export Development Corporation (EDC) of Canada, Export Finance and Insurance Corporation (EFIC) of Australia, Nederlandesche Credietverzekering Maatschappij Holding NV (NCM) of the Netherlands, Sezione Speciale per l’Assicurazione del Credito all’Exportazione (SACE) of Italy, and Treuarbeit of Germany. These organizations, along with another 40, belong to the Berne Union —their umbrella organization—which meets quarterly and shares information on investment and insurance trends.

2. Multilateral Institutions

14. Multilaterals entered the PRI market only relatively recently. The World Bank Group started operations in the PRI market with the establishment of MIGA in 1988. The World Bank revitalized its own guarantee program in 1994. The key difference between the two institutions is that the World Bank only provides guarantees with a host government counterguarantee, while MIGA provides guarantees without such a counterguarantee.

15. The World Bank’s current guarantee program started in 1994 with the introduction of a PCG and a PRG. Both guarantees are similar to the ADB guarantees with two major differences (i) a counterguarantee from the host government is always required, and (ii) stand-alone guarantees are possible.

16. Since the start of the program, the World Bank has issued five PRGs, ranging from $30 million to $240 million. These are for the Uch Power and Hub Power projects in Pakistan, power projects in Ivory Coast and Morocco, and a telecommunications project in the Russian Federation. Total PRGs provided by the World Bank amounted to $721 million as of fiscal year 1999.

17. MIGA was created with an initial authorized capital of $1.08 billion.⁷ Since underwriting its first guarantee contract in 1990, MIGA has underwritten 420 guarantees in 66 countries, facilitating the flow of more than $30 billion of foreign investments into developing countries.

18. MIGA provides coverage of equity investments, shareholder loans, and loan guarantees issued by equity holders. Loans to unrelated borrowers can also be guaranteed, provided equity or quasi-equity is concurrently insured with MIGA. Thus, no stand-alone guarantees can be provided to commercial banks, unless one of the project’s shareholders takes out MIGA insurance on at least a portion of that investment. MIGA’s term of coverage is typically up to 15 years, and the amounts that MIGA can guarantee for its own account can reach up to $110 million per project.

19. In 1995, MIGA started a coinsurance program, the Cooperative Underwriting Program (CUP), designed to encourage private insurers to offer political risk insurance for projects in developing countries that are members of MIGA. The CUP aims to address instances when a private insurer may not wish to assume additional risk in a host country on its own, but may be willing to do so in conjunction with an international organization such as MIGA. The CUP is a “fronting” arrangement, whereby MIGA is the insurer-of-record and issues a contract of guarantee for the entire amount of insurance requested by an investor, but retains only a portion of the exposure for its own account. The remainder is underwritten by one or more private insurers using MIGA's contract wording. The premium rates, claims payments, and recoveries are shared on a pro rata basis. More information on MIGA is provided in Appendix 1.

20. The Inter-American Development Bank (IADB) has had the ability to provide guarantees since its founding in 1959, but only in 1994 did it develop a guarantee program. The program, which was inaugurated in 1995, issued its first guarantee in 1996, but demand was much less than expected. After an internal review in 1999, IADB implemented the following important modifications to its PRG program:

1. IADB can now cover up to $150 million per transaction, or up to 50 percent of a project’s cost, whichever is less. Under the 1995 program, PRGs could provide guarantees up to 25 percent of a project’s cost or up to $75 million, whichever was less. This was in line with IADB’s prudential limits for private sector loan and equity investments. However, during the 1999 review process, both limits were doubled.

2. The 1995 requirement for the host government to provide a counterguarantee was dropped, as IADB found it difficult to secure such counterguarantees.

3. IADB renamed the product from “partial risk guarantee” to “political risk guarantee” to more clearly communicate to the market exactly what risks are covered. Users had been confused by the name of the program.

21. According to IADB’s Private Sector Department, demand for the program has increased significantly following the modifications to their political risk guarantee program. IADB is processing a number of guarantee transactions in the current fiscal year.

3. Private Sector Institutions

22. The two most dominant private sector underwriters in the PRI market are Lloyd’s of London and AIG.⁸ At Lloyd’s, aggregate contingent liabilities for PRI are estimated to be approximately $25 billion. Lloyd’s has the advantage of being able to pool underwriting capacity to insure large exposures of $1 billion to $2 billion per transaction. Other private insurers, such as AIG, are limited to maximum coverage of $150 million per transaction. While PRI coverage periods for private sector insurers have traditionally been limited to 3 – 5 years, some have recently offered to extend coverage for up to 10-15 years. Nevertheless, most private sector PRI policies continue to be issued for relatively short-term, mostly equity-related transactions in low-risk countries.

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