Continuity and change in credit and political risk insurance
Jonathan Bell talks with Anthony Palmer about his 41 years in the credit and political risk insurance (CPRI) market, the key events that have shaped its development, and what the future holds for BPL Global.
TXF: Anthony, tell us about how you got into credit and political risk insurance (CPRI), and what the market looked like back then?
Anthony Palmer: I came into the market straight after graduating in 1975, applying to four Lloyd’s brokers, which were CT Bowring (later acquired by Marsh), Sedgwick (which also became Marsh), TR Miller and Hogg Robinson. I had offers from three – I’m still waiting to hear back from Miller! In the end I plumped for the political risk subsidiary of Hogg Robinson – called III.
The CPRI market as we know it today simply didn’t exist back then. What one had was a series of monopolies in most countries consisting of one export credit agency (ECA) and one domestic credit insurer. The Lloyd’s market, meanwhile, offered very skinny pure political risk coverage, limited to confiscation, expropriation and nationalisation cover for foreign investments. The market had only just started providing export cover against pre-shipment risks (deemed contract frustration) and was forbidden from providing non-payment cover because of a ban on financial guarantees resulting from the 1923 Harrison Affair.
The capacity of the market in 1975 was tiny compared to today. You were probably looking at a maximum of $100 million per risk, whereas today, theoretically, there is $2 billion of capacity available. Similarly, the periods would have been limited to 12 months; today they can stretch to 15 years.
TXF: How did BPL Global come about?
AP: Charles Berry had joined III one year before, so we were colleagues, and in 1983 – along with Robbie Lyle – we formed BPL Global. The market had moved on significantly by then, and our main activity was the contract frustration business.
TXF: What drove the development of the CPRI market?
AP: Regulation, regulation, regulation. On the supply-side, there have been a number of significant milestones, with Lloyd’s very much leading the way. First, in 1982, the ban on non-payment cover was lifted – or, rather, an exemption was granted – so we could start insuring exporters against default and non-payment by government buyers. It was no co-incidence that we decided to form BPL Global shortly after this change to Lloyd's rules.
In 1985, Lloyd’s then began to allow underwriters to cover importers as well as exporters. This signalled a boom in the insurance of commodity traders against non-payment – and non-delivery – by public buyers. In 1990, we saw the next big breakthrough as Lloyd’s allowed its underwriters to provide contract frustration cover to banks.
On the demand side, the Basel regulations have fuelled a take-off in bank business – and the capital relief provided by CPRI products remains just as important a selling point today.
TXF: Apart from regulation, what would you say have been the other key broad developments that have influenced your market?
AP: Our market doesn’t operate in a vacuum, so general insurance market cycles have a significant impact. When the general insurance market (Property and Casualty, or P&C, market) is soft, insurers start looking at other classes of insurance which bring more attractive returns. Currently, it’s estimated that the P&C market in America has excess capital to the tune of $165 billion looking for a home.
Of course, geo-political and economic events are also a significant factor. Take the collapse of the Soviet Union, for instance, which created a number of supply chain issues across the region – and ultimately business for the private insurance market. As one example, aluminium smelters suddenly lost their supply of raw alumina, so the commodity traders stepped into the vacuum and supplied alumina, off-taking the aluminium and paying a tolling fee to the smelters. That business would probably not have been possible without private market support, as the banks were too risk-averse to finance it in the early days.
Our market has also been shaped by events from the Iranian revolution, to the invasion of Kuwait, the Asian crisis and successive commodity price collapses. All led to claims, but also stimulated demand.
More recently there has been the Arab Spring, which lowered the risk tolerance of those exporting and contracting overseas, and resulted in a few small claims. I vividly remember giving a presentation to a group of Turkish contractors in Ankara about six months before the Arab Spring began. They listened very politely, and then explained that most of their contracts were in rich, oil-producing countries in North Africa and the Middle East, with stable – albeit non-democratic – governments. Libya alone is understood to have cost them $10 billion – most of which was uninsured.
TXF: How about the global financial crisis (GFC)?
AP: If anything it was a ‘good’ crisis for the market – an estimated $2.5 billion of claims were paid, which went a long way to validating the CPRI product. There were banks that were wondering whether the product would do what it says on the tin, and the answer was emphatic.
However, the Asian crisis of the late 1990s was probably more significant because it was an emerging market crisis, whereas the GFC was a developed world crisis.
TXF: How do you think brokers have helped in the evolution process for CPRI?
AP: I think what we have seen is brokers and underwriters coming together to develop new types of cover, lengthen periods and add capacity in order to enhance the market’s offering.
In 1994, for instance, we were instrumental, along with the Hiscox syndicate, in developing cover for private buyer non-payment, following a further dispensation from Lloyd’s. On the pure political risk side, we have also done much to create a market for ‘war risks on land’, initially covering the equipment of engineering contractors and construction companies against confiscation and nationalisation, deprivation, as well as the full spectrum of political risks.
It’s also worth adding at this point that some banks have in the past bought pure PRI on a direct basis, but that has often ended in tears. Take the case of Argentina at the turn of the millennium, for instance. At that point, bank credit committees sanctioned loans to private Argentinian borrowers on one condition: there was insurance against country risk. As such, the bankers approached some American insurers directly, purchasing narrow PRI policies which, more often than not, only covered currency inconvertibility.
In 2001, in the midst of an economic crisis, the Corralito happened. The exchange rate was liberalised and the value of the peso – previously pegged to the dollar – went into freefall. Suddenly, borrowers couldn’t repay their dollar loans. So, lots of them went bust. ‘No fear’ thought the banks, which submitted claims to their insurers, only to be told that the PRI cover they had bought excluded insolvency and financial default. Some of those claims went to arbitration and caused some mistrust between banks and insurers, setting back the market as a whole. But it also highlighted the value of the broker.
TXF: What have been your biggest challenges during your time at BPL Global?
AP: It would be wrong of me to portray our journey as plain sailing. The Lloyd’s crisis of the late 1980s certainly had us worried and could have had huge ramifications for our market. Fortunately, ‘Reconstruction and Renewal’ saw it emerge from that crisis for the better.
The one dip we’ve had as a firm was in 2002 in the post 9/11 hard market when we had to lay-off staff and, effectively, batten down the hatches.
TXF: How have you seen the industry change in specific geographic centres? Is London still the lynchpin?
AP: We began as a London wholesaler, we are now a global retailer. In 2016, we did about $400 million of premium and the majority of that was in London, which remains the most important CPRI market. I can’t see that changing.
After that, New York has always been an insurance hub and Singapore has cemented its position as the third most important market globally. Having opened our Singapore office in 2012, I spent three years out there, over which time I witnessed the local market make big strides forward with the number of insurers more than doubling.
Elsewhere, Bermuda remains a key player and Dubai, where we opened a rep office in 2015, is emerging. As you may know, Lloyd’s began its life as a coffeehouse. We like to say that the CPRI market has now evolved into a global coffeehouse.
TXF: Overall, do you see the private sector playing a much bigger role in ECA-backed export and project finance, and in pure project finance going forward?
AP: The major providers of CPRI are still the ECAs and multilaterals, which get the first pick of what qualifies for ECA business. Our vision for the medium-to-long-term (MLT) market, however, is a competitive one where the ECAs continue to offer capacity and stability, but exporters and bankers automatically explore private market alternatives, rather than viewing it as the market of last resort.
We believe the private market has now established itself as a real alternative. Indeed, the bulk of our portfolio is now MLT in emerging markets – the traditional preserve of the ECAs – and the market can now offer tenors up to 15 years or longer.
As far as pure project finance cover is concerned, only a handful of private insurers are active in the space, although it’s growing slowly.
TXF: How do you see the CPRI market today? What do you think needs to change?
AP: While continuity is something we promote, we don’t like to stand still. I think there are four things the CPRI market needs to do better: develop a clearer identity, improve the claims process, avoid government insurers competing with their clients, and improve the pure PRI offering.
The claims process is a particularly interesting one. While the market’s claims record is good, we believe that the process can be improved – and the secret to doing that for non-payment is self-certification. Pioneered by Swiss Re, this means that policyholders can ‘self-certify’ upon default of the obligor, and demand claim payment within 10 days. Only after payment would the insurer then do their own due diligence (and attempt to recover the claim if they deemed it invalid). Of course, this would only be suitable for major clients that have a deep, long-term relationship with the market. But, for them, it would be a huge step forward. Will other insurers follow Swiss Re in offering self-certification? We shall see.
TXF: What does the future hold for BPL Global?
AP: Keep on keeping on. We will remain an independent, employee-owned, specialist broker. This seems to work for our clients so we see no reason to change.
For us, continuity is key. My retirement hasn’t come out of the blue and we have had succession plans in place for a long time, with two young dynamic joint managing directors, James Esdaile and Sian Aspinall, to take us forward. Everyone asks about Charles [Berry] – but he’s staying put!
TXF: And for you personally?
AP: My first task is to get the garden ready for my younger daughter’s wedding! Other than that, I’ll be focusing on lowering my real tennis handicap and expect my ski holidays may now stretch from weeks to months.
As an avid cricket fan, I’m off to Brisbane in November to complete the Ashes set, having been to the other four tests. In 06-07 I went to Perth, Melbourne, Sydney – lost, lost, lost. The next series, which we won, I missed. Then the next time we were down under, I was in Singapore so managed to get over to Adelaide. You guessed it – we lost. I think the England team may prefer it if I stay at home!
In terms of BPL Global, I’ve had an amazing journey and, after 34 years, will miss it greatly. That said, I’ll remain a shareholder and non-executive director so they won’t get rid of me completely! I look forward to taking a back seat and watching the journey with the new generation at the wheel.
TXF: Thank you Anthony, and we wish you well in your retirement years.