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p. 5 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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C. Premium Rates and Loss Histories of Major PRI Underwriters

23. Economic sustainability of the PRI market depends primarily on three variables: (i) premium income; (ii) financial payouts of claims; and (iii) recovery rates (i.e., the amounts that the insurer or guarantor can recover from the host government, or otherwise, after a claim is filed and paid).

1. Premium Rates for PRI

24. In the public sector PRI market, base rates are typically established by type of investment, indicating how an average risk would be rated for specific coverage in specific sectors. Actual premium rates can vary significantly by country and project. Because transactions tend to be underwritten on a project-specific basis, the underwriter may increase or decrease base rates by 30 percent (or more), based on an assessment of project-specific risk (Appendix 2 provides details on the pricing of PRI).

25. In the private sector PRI market, premium rates are a function not only of perceived risk, but also of underwriting capacity for specific countries and sectors, which may vary significantly over time. For example, during times of perceived political instability in a country, PRI underwriting premia for new projects may increase up to 500 basis points per annum, only to fall back again to their original level after the perceived risks subside. Premium rates in the private market are very much comparable to spreads on sovereign bond issues by developing country issuers that tend to fluctuate widely during times of political or economic uncertainty.

2. Claims Histories and Recovery Ratios

26. Among the multilateral PRI institutions, MIGA has made only one payment since starting operations in 1990.⁹ Few countries are willing to default on an exposure to a multilateral institution such as MIGA.

27. Among the Export Credit Agencies, OPIC has published its claims ratios since 1971. It has received several claims, in particular in Chile in the early 1970s, Zaire and Sudan in the late 1970s, Iran in the early 1980s, and the Dominican Republic and the Philippines in the mid-1980s. As of 30 September 1999, OPIC and its predecessor agency have paid 265 claims to investors, representing $564.4 million over the last 28 years. OPIC has achieved a recovery rate of 95 percent, i.e., $536 million was recovered from host governments, while the net loss to OPIC was only around $28 million.

28. Because of confidentiality requirements, claims histories are not widely available for private sector PRI institutions. However, some data are available for Lloyd’s of London from 1991 to 1995. Total claims for this period amounted to $66 million, representing a 9 percent claims ratio as a percentage of total premia, while recovery ratios were estimated to be approximately 50 to 75 percent.

29. Between 1972 and 1997, AIG paid a total of $378 million to clients to settle 211 claims. Its recoveries have totaled $263 million, amounting to a 70 percent recovery ratio.

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