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World Bank Report: World Investment and Political Risk, 2013

Published December 5, 2013

The World Bank's Multilateral Investment Guarantee Agency works to promote foreign direct investment (FDI) into developing countries and produces a report on investors' perceptions of political risk as they affect FDI, as well as the role of the political risk insurance industry in mitigating these risks.

Excerpt from the executive summary:

"MIGA's annual roundtable of private insurers and brokers in 2013 highlighted a number of interesting trends in the private market. The growing capacity in the market, including several new entrants, continues to push participants to lengthen their tenors and to innovate in product offerings. Underwriters are entering into sizeable deals with tenors of up to 14 years, with even longer private-market tenors now possible. Discussions with the private insurers highlighted a number of new comprehensive and more tailor-made products. A recurrent theme was the potential for wider market coverage if private and public insurers cooperated more closely on co-insurance, a mutually beneficial exercise that could extend tenors for the private participants and increase the scope and size of cover overall, especially in more challenging markets.

This year's report takes a close look at product offerings across the market. The evolving marketplace has seen a growing role for public providers, reflected in an expansion of their product lines, notably with MIGA offering its non-honoring product to state-owned enterprises, and the Overseas Private Investment Corporation (OPIC) of the United States now covering investments by private equity funds (with other public providers also looking at such cover). As was the case last year, the elevated political risk perceptions of investors have continued the revival of demand for existing products. In light of the elevated political risk in the Middle East and North Africa, there has also been ongoing interest in coverage for existing investments, while concerns about stress on public finances have led public providers to expand coverage for non-honoring of financial obligations. While the Lloyd's market has been offering this coverage for some time, the expansion of public cover has permitted an increase in both capacity and tenors.

The claims picture is often a volatile one, with perhaps understandably lower levels of transparency across some parts of the market. As such, it is generally harder to make strong conclusions on the basis of available information, especially on a single-year basis. Notwithstanding this, the low levels of paid-out claims in 2012, at $125 million, are far below the highs seen in 2010 as a result of the global financial crisis, and considerably lower than the $179 million reported for 2011. Additional claims, which might be expected from a substantially expanded market, have not yet arrived.

Despite elevated perceptions of political and economic risk, the majority of respondents in the MIGA-EIU Political Risk Survey 2013 have no plans to withdraw or cancel investments in developing markets. Within the range of political risks, breach of contract and regulatory risks once again top respondents' concerns. Survey results show that these concerns are based on actual experience as well as sentiment, with respondents rating these factors as the key political risks that resulted in actual losses over the past three years."

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