OPIC: Political risk insurance claims and coverage for political violence – A necessary instrument for investors and NGOs to mitigate investment risk

The Overseas Private Investment Corporation, (OPIC) is a long-time Berne Union member that mobilizes private capital to help address critical development challenges, and in doing so, advances US foreign policy objectives. As the US Government’s development finance institution, OPIC provides political risk insurance and project financing for US investors, lenders, NGOs, and impact investors seeking to invest in more than 160 developing economies and countries transitioning from nonmarket to market economies.

OPIC political risk insurance – and OPIC’s strong record of protecting investors and paying claims – has helped investors make a positive impact in countries and sectors where attractive opportunities merge with uncertain political and economic conditions. A fundamental benefit of OPIC’s involvement as a political risk provider (including direct insurance and reinsurance) is its willingness to advocate on behalf of the insured party before conditions deteriorate to the point of causing losses and result in claims.

When OPIC is an insurer, it will work to avert claims before they materialise by working with the insured investor, other US government agencies and the local US embassy, and host government authorities. OPIC’s claim process is designed to ensure protection of the insured party and the project, if possible, while prudently managing the US government funds that back OPIC’s political risk insurance.

When OPIC has paid or settled claims, its recovery rate has been outstanding. Since 1971, OPIC has made 298 insurance claim payments and settlements that total $977.2 million, and its recoveries on those claims are $1.006 billion, or 103% of total claim settlements through FY2015. This information, and the memoranda of determinations that underlie OPIC’s claims decisions are found on the OPIC website at www.opic.gov.

Types of coverage and benefits for insured parties:

OPIC political violence coverage

OPIC’s political violence (PV) insurance coverage continues to be an important part of OPIC’s risk mitigation products. This compensates investors for equity assets (including property) and income losses caused by such actions as: declared or undeclared war; hostile actions by national or international forces; revolution, insurrection, civil strife; terrorism and sabotage. In the event of such loss, OPIC pays compensation for two types of losses:

• Assets: Damage to covered tangible assets; and
• Business income: Income losses resulting from damage to assets of the foreign enterprise caused by political violence/terrorism.

Investors may purchase one or both coverages. In addition, OPIC can provide coverage for:

• Evacuation expenses
• Temporary abandonment or income losses due to political violence that causes evacuation or forced abandonment of a project
• Special riders: OPIC can also provide specialised coverage to compensate for income losses resulting from damage to specific sites outside the insured facility, such as a critical railway spur, power station, or supplier

OPIC PV coverage can be a decisive factor in enabling investors, contractors, NGOs, and educational institutions to commit capital, resources and sorely-needed expertise into countries and regions that desperately seek such support for security, stability, economic growth, and job creation.

PV coverage and private investors

For private investors, PV coverage can be an important factor when determining whether to invest or whether to rebuild and restart operations. For example, a US company, Seaboard Overseas Limited (Seaboard), has been insured by OPIC against political violence in several risky emerging markets.

Zambia: OPIC provided political risk insurance to Seabord Corp. in a project in support of food security. In 2012, OPIC paid a $38,027.37 claim to Seaboard as compensation for the adjusted cost of lost Covered Property (grain silo equipment and various food products) destroyed or taken during post-election riots in that African nation

Haiti: Seaboard is also part of an investor group that purchased OPIC PV coverage in Haiti that enabled the investors to mitigate the risk of doing business in one of the poorest and most unstable countries in the Western Hemisphere. The investors purchased a mill that produced as much as 95 percent of the flour consumed in Haiti that had been unfortunately destroyed during the massive 2010 earthquakes in Haiti. It was then reconstructed.

In the Haitian project, there has not been a claim but it was critical for the investors to commit their capital. OPIC PV insurance covers damage to assets or business income loss resulting from political violence. This coverage allowed the insured investors to reconstruct the facility – including a flour mill, offices, warehouse, storage silos, machine shops, and an electricity generating plant – which was completed in December 2011. Along with increased production capacity and more modern equipment, the facility created 150 local jobs and increased the supply and distribution of flour throughout Haiti.

While OPIC frequently works with private sector businesses that use OPIC financing or political risk insurance to support their operations in emerging economies, the agency also supports the work of non-profit organisations and NGOs. One long-time OPIC partner is the International Rescue Committee (IRC), one of the world’s largest humanitarian organisations, which responds to humanitarian crises around the world to help address vital nutrition, health care, housing and subsistence farming needs. IRC has used OPIC political risk insurance in more than 20 countries to enable it to continue its work in countries embroiled in political violence. “The support IRC receives from OPIC is really indispensable,” IRC’s vice president for policy and advocacy has said. “When our operations are threatened, OPIC is right there with us providing the insurance and backup that we need to keep our operations moving forward.”

Specifically, OPIC has paid separate political violence claims to IRC in three countries since 2014, totaling more than $874,000. Recently in Yemen, OPIC agreed to pay IRC up to $73,711.80 for covered property (medical supplies and office equipment) that was looted or destroyed. Similarly, in 2015, OPIC paid up to $205,000 to IRC for replacing covered property (office equipment and vehicles) lost and destroyed during armed conflict between opposing forces in South Sudan, where IRC has been working to stem gender-based violence and provide health care and child survival programs. And in 2014, OPIC paid IRC a $595,413.40 claim to replace destroyed covered property (office equipment and vehicles) in the Central African Republic, where IRC has been providing emergency aid and long-term assistance to refugees and displaced persons since 2006.

PV coverage and educational institutions – evacuation coverage and loss of income

In 2011, OPIC provided political risk insurance in connection with the American International School of Bamako in Mali. The insurance protected against loss of business income, including evacuation expenses that resulted from political violence. At that time, the West African nation was a stable democracy. But in the year after OPIC provided the insurance, the political situation in Mali deteriorated rapidly, a group of Malian soldiers seized power, which caused school officials to evacuate and close the school. After reopening the school in August, a claim was filed for loss of income resulting from the political violence, and in February 2013, OPIC paid a claim of almost $1.4 million. Today the school is open as it continues to monitor security in the region. Its ongoing operation is helping support the community of international aid workers and diplomats who are helping advance development and stability in Mali.

Potential opportunities for cooperation

Recently, OPIC has focused its efforts on working more closely and effectively with other investment insurance providers. This has resulted in new and innovative facilities where OPIC has entered into reinsurance, pooling, and other risk sharing agreements with private insurers and with public insurers, both multilateral and bilateral.

It is reasonable to hope that these efforts will result in political risk insurance facilities that can mitigate the daunting risks of political violence faced by investors and developers seeking to develop critically needed projects, e.g., humanitarian assistance, transportation infrastructure, water, and waste treatment and agricultural. OPIC’s history and familiarity with PV coverage and claims provide a sound foundation to find ways to cooperate among Berne Union members to meet the needs of the insured, while being fully compliant with the relevant criteria and objectives of the insurers.

Tracey Webb

Vice President, Structured Finance and Insurance - OPIC