Political Risk Reinsurance Pricing – A Capital Market Approach

Athula Alwis~Vladimir Kremerman~Yakov Lantsman~Jason Harger~Junning Shi, United-States

Political risk insurance is concerned with the risk associated with government intervention and restriction of trade into emerging markets. It may encompass long-term perils (investment related), such as the confiscation, expropriation or nationalization of an infrastructure project in an emerging market or short term perils (export trade related), such as contract frustration, embargo or currency inconvertibility. Today exposure to the political will of a host country is being challenged by economic events blurring the landscape for political risk, which is creating a growing need for better informed econometrics, and advanced analysis of risk vs. reward, as well as a broader interpretation of covered perils and events. The need for reinsurance capacity in Political Risk is higher than it has been in a decade. However, more and more reinsurers are either restricting the coverage or entirely leaving the practice. This paper proposes an objective reinsurance pricing methodology to assess the risk of writing a large political risk reinsurance portfolio based on country risk ratings, sovereign ceilings, political risk default rates and severity assumptions based on historical data. The paper also incorporates a mechanism to indicate the effects of regional and trade correlations based on the advanced credit modeling. Having such an objective methodology to assess the risk of reinsuring political risk should broaden support from traditional reinsurance markets and attract risk capital from the capital markets.
Date: 30 May - Time: 13:45 to 15:15 - Room: 251
Theme: 1.A. Stochastic dependence