Multinational companies should think carefully before using a captive underwrite catastrophic political risks, according to Marsh.
Marsh’s market update, which reviews the political risk insurance market globally as the second half of 2015 approaches, showed that market capacity for political risk insurance now exceeds $2 billion for a single policy—nearly double the available capacity just six years ago.
Insurers generally view political risk as an attractive line of business in which to compete, according to Marsh, and with pricing at an all-time low, multinational companies are increasingly purchasing political risk insurance to protect shareholder value, support growth in foreign markets, and help secure financing from lenders.
But they are also turning to their captives, with the number of captive insurers writing political risk insurance coverage nearly doubling from 2013 to 2014.
“Although self-insurance can offer several benefits, political risk losses can be catastrophic,” said Marsh.
“The cost of paying just one claim for expropriation of assets could leave a captive insolvent unless it is well capitalised. Insureds should think carefully about using a captive to underwrite political risk—especially given the current favourable conditions in the commercial marketplace.”
