market report - JLT Specialty

MARKET REPORT CREDIT, POLITICAL & SECURITY RISKS OCTOBER 2016

THE VIEW FROM ABOVE

EGYPTIAN FIT PROGRAMME

INSURANCE ACT

ALSO IN THIS ISSUE

The current political environment set against 2016 NATO summit backdrop

How to mitigate political risk exposures

How the Act aims to redress the balance between insured & insurer

Making Your Terrorism 10 Response Fit For Purpose

Page 5

Page 6

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Africa’s Foreign Exchange Crisis

12

Emergency Evacuation: A New Consideration For Academic Institutions ASHLEY COLES Assistant Director Kidnap & Ransom at JLT Hong Kong

A recent and drastic deterioration in the global security climate has prompted academic institutions across Asia, to take hard look at the safety of their students and staff both at home and overseas. In 2014 20% of victims of kidnap

most high risk location in the world for

and threat globally, were students

natural catastrophe risks. Schools and

and dependents. However it isn’t

universities have the unenviable task

just security concerns which top the

of juggling the necessity to provide

lists of the agendas of schools and

the highest levels of education and

universities but also natural disasters.

opportunity while at the same time

With a staggering 41% of the worlds’

ensuring all those under their jurisdiction

natural disasters occurring in Asia

are protected.

“With 41% of the worlds’ natural disasters occurring in Asia between 2004 and 2014, APAC is the most high risk location for natural catastrophe risks”

between 2004 and 2014, APAC is the Continued on page 2 

2 CREDIT, POLITICAL & SECURITY RISKS | MARKET REPORT | OCTOBER 2016

kidnapping for ransom of the child of

the perpetuation of religiously motivated

a high net worth individual or celebrity

attack has meant that even those taking

or the wider threat of gang rivalries,

time out to study in Paris, Brussels or

civil unrest, a missing student, natural

London could be caught up in an incident

disasters, drugs hidden on the premises,

so it isn’t necessarily medium or high risk

outsiders on campus or a mentally unwell

locations where schools and universities

happens and how do I resolve the

student with a deadly weapon?

could find themselves urgently checking

incident in a safe and timely fashion?

While the risk of an attack of some kind

Schools and Universities have a unique

on campus is a possibility, the main

In the case of short trips or excursions

concern for academic institutions in Asia,

the security of students is generally

tends to be the safety of their students

easier to manage because staff are

when overseas or away from home.

often present and are able to monitor

Globalisation has meant that students

the whereabouts of those on the trip.

benefit from a whole range of exciting

However there are of course events

opportunities for study abroad. It is not

which are out of anyone’s control and

uncommon for placements to be in high

two major earthquakes in Japan and one

risk locations across the Middle East,

in Ecuador in 2016 left large numbers of

Africa, Latin America and East Asia.

Hong Kong and international students

For example, international relations and

stranded for up to a week. In April 2015

politics students often spend time in or

a 7.8 magnitude earthquake hit Nepal

near conflict areas or territories of global

and killed more than 8,000 and injured

political importance, the Middle East is a

21,000. This event demonstrated the

draw for archaeology students and those

worst case scenario for staff looking

studying languages will often spend a

after groups of students. Continuing

year studying abroad. In the same vein,

aftershocks meant that the airport

 Continued from page 1

The question keeping most academic institutions awake at night is two-fold. What do I do when an emergency

duty of care in the sense that their position as ‘in loco parentis’ never fully ceases throughout the period that students are on their premises and indeed on exchange programs and school trips and excursions. Firstly, no two institutions are alike and therefore, there is no single approach to security that will work for all schools; to appropriately devise security strategies, institutions must define their own assets to fully understand what or who is most at risk. Secondly, they must be able to define their threats according to their location – who or what is the institution threatened by? Is it the risk of the

their crisis response procedures.

“to appropriately devise security strategies, institutions must define their own assets to fully understand what or who is most at risk”

Continued on page 3 

www.jltspecialty.com | MARKET REPORT 3


was only intermittently open and with

Istanbul, one of the most diverse and

loved ones to get their family members

thousands of foreign nationals urgently

historical cities in the world has long

back and the question will be asked –

trying to leave, the situation was critical.

been a destination for students. On the

what do you have in place? How will

The only option at this stage would be

15th July 2016 the city descended briefly

you get them back? While Governments

to look at moving students over land,

into chaos as an attempted coup d’état

have taken the decision to launch mass

and across the border into Northern

took place. The thing which shocked

evacuations and repatriations in the past

India. While this may sound simple, the

most analysts was the speed with which

(such as from South Sudan in July this

challenges involved organising (very

the situation deteriorated and for anyone

year following days of violence) academic institutions accept that they cannot necessarily rely on them to assist in every

“In April 2015 a 7.8 magnitude earthquake hit Nepal and killed more than 8,000 and injured 21,000.”

incident. Whether a government decides to assist will depend on a whole range of factors including the nature of the crisis and their ability to provide response. It would generally require a very serious and high risk scenario to trigger a government to respond and evacuate

hard to come by transport) safe transit

in Istanbul or Ankara at the time would

and repatriate citizens so those with

through some of the most dangerous

have appreciated how easily somewhere

people under their duty of care should be

geography in the world, ongoing

can be a tourist destination one day and

aware of the incidents which fall beneath

landslides and then arranging the right

conflict area the next.

this threshold.

Academic institutions in Asia recognise

Traditionally, being able to employ a

that in these types of scenarios, they

private firm to evacuate those under

will be lobbied by students’ parents and

ones duty of care has been the privilege

documents to allow the students across the border into India serve to underline the value of a specialist insurance policy.




“to evacuate is a major decision and by taking a sensible course of action, one may be able to avoid evacuation while also remaining safe”

of a lucky few but following an increase

into much needed peace of mind for

to be at a remote mine site in the desert

in demand there are now cutting edge

those with a duty of care. Evacuation

to be exposed. For example, hospitals,

products in the market which allow

specialists who sit behind the policy

clinics and retirement centers have a

clients to purchase an Emergency

also help the insured to understand that

unique set of exposures. The difficulty

Evacuation Insurance policy for relatively

to evacuate is a major decision and by

of moving elderly, unwell or immobile

small premiums and to have access to

taking a sensible course of action, one

patients is not lost on those in the

specialists “on call 24/7” and globally.

may be able to avoid evacuation while

medical professions and in many cases

These policies are designed to respond

also remaining safe.

requires expert, specialist assistance.

While academic institutions are at

These insurance policies are not just

the top of the list where duty of care

designed to respond in the event of an

is concerned, all industry types, no

emergency but also provide expert pre-

matter how small or large are aware

incident advice and training. This allows

of the essential nature of emergency

companies, schools and universities

response and the necessity of having

to enjoy well–devised emergency

the right procedures in place to mitigate

evacuation plans and an educated

a crisis. Those in the mining, oil and

awareness of the risks, helping to both

gas and telecommunications industries

mitigate and avoid a potential disaster.

particularly recognise the importance

While emergency evacuation policies can

of being able to get their people out

be purchased stand alone, they are often

of a disaster zone. For those in these

taken up in conjunction with a kidnap

industries the challenges are potentially

and ransom policy as a holistic “people

overwhelming. In many cases, their

risks package” meaning that those who

projects are in highly remote, very difficult

have this in place can sleep easy at

to access locations meaning that the

night in the knowledge that no matter

impact of an event can be severe and

where they are and what the scenario is,

getting to those affected in the first

effective resolution is not far away. 

to almost any perceivable emergency be that a security incident, a political threat or a natural catastrophe and can be put in place for a trip or on a longer term basis. While the policy allows clients to trigger a deployment team to assist them and to cover the cost, this is a relatively rare scenario. In fact in the majority of cases, a situation can be safely resolved simply with expert telephone advice. Sometimes, the simplest advice can be the most effective but without this expertise it can be difficult to know how to react in critical situations. This is true of several recent events which although shocking in the short term, were resolved within 24 – 48 hours allowing those caught up in it, to continue with their jobs, studies or travels. Having an expert on the end of a telephone providing real time updates and advice translates

place can be complex and unbelievably expensive. However one doesn’t have


The View From Above ANDY TAYLOR-PRESTON Head of CPS Analytics at JLT Specialty Limited

ABOUT MARKET Welcome to JLT Specialty’s (JLT)

Andy Taylor-Preston, Head of Credit, Political and Security Analytics (CPSA) shares some thoughts on the current political environment set against the backdrop of a very significant summit meeting which was largely ignored by the front pages in their “summer season” reporting.

market report, which offers a round-up of recent developments in the Credit, Political & Security risk market (CPS). The report provides

On 9 July the 2016 NATO summit

These are just a few points from a long

drew to a close in Warsaw. The 28

and diverse range of risks currently

insights into market trends, capacity

members discussed noteworthy

facing NATO and its members. Many

and pricing, technical developments

developments, including:

of these risks can translate into events

and claims and losses.

Russia •• Russia continues to test the NATO

that can seriously impact a business operation. The political landscape may be susceptible to short notice, unexpected

forces preparedness with incidents

change prompted by events in countries

such as military aircraft breaching

such as Syria, or the evolution of

airspace along NATO borders and

negotiations between the UK and other

flying within 500 metres of warships

EU countries on the exit programme.

in the Black Sea1. •• NATO remains concerned by Russia’s military activity and their intervention in the Ukraine which has led to a strengthening of the alliance forces in the east. •• NATO has responded by announcing that four multinational battalions will be deployed on a rotational basis to Estonia, Latvia, Lithuania and Poland increasing the ability to deter and defend. Security •• The threat from terrorism in recent years has been unrelenting

An example of this and since the NATO summit took place we have also seen a failed coup d’état attempt in Turkey which has prompted a three month state of emergency enhancing the powers available to President Erdogan. All these factors contribute to a potentially volatile trading environment. The threat from terrorism is a truly global concern and regardless of the NATO commitment and the effectiveness of security and intelligence agencies, there will always be a risk from unsophisticated attacks tragically highlighted by

JLT is a leading CPS broker, handling credit and political risk insurance capacity for our clients of approximately USD 70 billion at any one time.

SIZE OF THE PRIVATE MARKET The potential and theoretical available capacity for contract frustration, structured credit and investment (equity and debt based) risks has been summarised in the table below: Capacity is estimated on a per transaction basis. This represents “theoretical capacity” that in practice will rarely ever be available for a single transaction due to (a) differing levels of risk appetite, (b) existing risk aggregation, and (c) different price and tenor requirements.

recent events in France, Australia, USA, Turkey and the Philippines. Potential Private Market Capacity

prompting a commitment by NATO allies and partners to

Across our Credit, Political & Security

contribute further to the global

(CPS) risks team we have brokers and

coalition to counter IS terrorism

analysts that can provide the expert advice

particularly with the direct NATO

to help organisations make an informed

aerial surveillance support.

decision relative to their risk exposure.

•• A commitment to cyber defence and improvements to cyber defences of national networks and infrastructures2. •• The members also pledged to offer assistance with the migrant crisis in/

The bespoke insurance solutions that CPS offers provide a proportionate response whilst being transformational in enabling a business to address such exceptional considerations. 

around the Mediterranean. 1 http://www.telegraph.co.uk/news/worldnews/northamerica/usa/11645155/Russian-planes-filmed-

flying-close-to-US-warship-in-Black-Sea.html 2 http://www.nato.int/cps/en/natohq/official_texts_133169.htm?selectedLocale=en

Tenor

Contract Frustration (USDm approx.)

Structured Credit (USDm approx.)

Investment Risks (USDm approx.)

Up to 1 year

2,462

1,969

2,390

1 to 3 years

2,402

1,819

2,390

3 to 5 years

2,365

1,775

2,220

5 to 7 years

2,130

1,228

2,155

7 to 10 years

1,445

415

1,470

10 to 15 years

1,040

200

1,065


Egyptian Renewable Energy Solar Photovoltaic Feed-In-Tariff Programme HARRY DOYNE-DITMAS Manager CPS Middle East & Africa at JLT Specialty Limited

Ready, steady… wait! Whilst the highly anticipated Egyptian renewable energy solar photovoltaic (PV) feed-in-tariff (FiT) programme has international investors ready and waiting; JLT looks at the political risk exposure under the programme and what can be done to mitigate these risks. Under Sisi, Egypt has been going through

more importantly the government is

news is that Egypt has the highest wind

a process of consolidation both politically

seeking to reassure current and potential

energy potential in the MEA region and

and economically in order to re-align the

new foreign investors at a time when

enjoys direct solar radiation of between

country following the Arab spring in 2011.

Egypt needs it most.

2000-3200 kWh/m2/year across its

Central to the economic recovery is the Egyptian government’s ongoing security policy. Continuing operations battling the insurgency in the Sinai Peninsula and, following the downing of a Russian Metrojet Airbus, rebuilding the perception of the international community towards the security of the country have been key themes that the government remains

Egypt is now struggling to meet its own energy needs: energy generation capacity currently shows a negative

land mass - these are considered good values for renewable solar energy production. With such potential, in 2014

reserve margin relative to peak demand. With capacity shortfalls, it is projected that Egypt requires a spend of USD 3-5 billion on average per year to meet the country’s energy demands.

focused on improving. Today, tourism

With the constant requirement to

contributes around 5.6% of Egypt’s GDP,

diversify the energy mix, Egypt has

down from 11 % in 2010 so it is clear why

sought to develop their renewable

security is such a priority, but perhaps

power generation capacity. The good

USD

3-5 bn It is projected that Egypt requires a spend of USD 3-5 billion on average per year to meet the country’s energy demands.



 Continued from page 6 The Egyptian Ministry of Electricity and Energy announced a FiT programme for electricity generated by solar and wind. The tariff regulations were seen as being fairly comprehensive for small and large scale power projects and therefore attracted a lot of international interest. Since the FiT announcement in 2014 a number of potential international power developers have worked hard to meet the FiT bid requirements - such as forming a local registered company and paying up a portion of share capital as

Furthermore, whilst each project above 500 kW will benefit from a government guarantee issued by the Ministry of Finance, the PPA will be denominated in USD but payable in Egyptian pounds. Effectively the Egyptian government is picking up the exchange risk (which is significant since the Egyptian pound has not been pegged to the USD since 2003 and the country has notable foreign exchange shortages) however this also means that investors carry the same risk on the Egyptian government i.e. both a conversion from EGP to USD will be permitted and a USD transfer out of

well as making themselves comfortable

Egypt allowed.

with the bankability of the investment.

In light of the wider security concerns in

However, concerns have been raised in a number of areas relating specifically to the 2,000 MW solar PV FiT scheme, the most crucial being the local arbitration under the Power Purchase Agreement (PPA) and the currency exchange risk. Since the Egyptian government has refused to offer the option of international arbitration in the first round of contracts under the solar PV FiT awards both the International Finance Corporation (IFC) and Commonwealth Development Corporation (CDC) Group have pulled out of round one arguing that the project documents should specify that

Egypt and the government’s behaviour during the negotiations of the solar PV FiT programme, many investors in rounds one and two of the scheme are justifiably looking at further ways to mitigate the political risks associated with their investment. The good news is that there are bespoke insurance products designed specifically for Egypt’s FiT programme which address the key investor concerns; political risk cover extending up to 15 years and covering currency inconvertibility and/or non-transfer risk has made the investment risk much more palatable for a number of international investors looking at

discriminatory reduction in tariff which damages the investor’s cash flow but does not derail the project itself. Such cover is predicated upon the insurer having recourse to the insured at a holding company level for recoveries following a paid claim in the event that

any arbitration related to the projects

both round one and two.

recovery under arbitration does not

would be held in a ‘neutral’ territory

Coverage for currency inconvertibility

possibly being derived from cash

and losses arising from breach of the

flows from other projects within the

PPA for both debt and equity supporting

company). This ‘business interruption’

foreign owned projects involved in the

type cover can be particularly valuable

FiT scheme are some of the major

when managing a number of assets

differentiators when comparing political

in a portfolio and demonstrates

risk insurance (PRI) to more off the

the innovation of the PRI market in

shelf covers often purchased in Egypt

providing solutions to assist investors

such as stand-alone political violence

in managing their risk appropriately.

such as Geneva, Paris or London whereas Egypt’s government wants any arbitration to be held in Cairo. The Egyptian government, via the Egyptian Electricity Transmission Company (EETC) has now confirmed that international arbitration will be offered in the second round of contracts offered under the scheme but the FiT tariff will be far less generous with reductions from 13 cents per kWh to as low as 7.8 cents per kWh.

and terrorism insurance. Specialist PRI insurers are also starting to provide cover for non-payment under the PPA or even protection against a

succeed for the insurer (recoveries

The availability of specialist political risk insurance is therefore fundamental to facilitating investment into Egypt in a way which addresses day-to-day concerns relative to the convertibility of EGP and

“There are bespoke insurance products designed specifically for Egypt’s FiT programme which address the key investor concerns.”

safeguards the investment for the long term. In this way it may still be possible for Egypt to meet its target of producing 20% of its energy need from renewable sources by 2022. 


Insurance Act 2015 KATE MUIR-JONES Associate, Credit & Political at JLT Specialty Limited

The Insurance Act 2015 came into effect on 12 August 2016 with the aim of re-balancing the positions of the insured and insurer, from what was perceived as a current imbalance in insurers’ favour in terms of historic ‘standard’ policy terms, conditions and warranties which have created areas rife for policy dispute or even claim invalidation between insureds and insurers. This is the most important and far

the Law Commission of the UK for our

every material circumstance which the

reaching piece of legislation for the

own guidance as to the rationale

insured knows or ought to know. Failing

insurance industry since the Marine

behind this new legislation.

that, disclosure should give the insurers

Insurance Act of 1906 was implemented.

The Law Commission were the

sufficient information to put a prudent

sponsors and writers of the Act itself

Insurer on notice that further enquiries

prior to implementation and look to

are needed and, importantly, information

explain intent, reasoning and case

must be provided in a manner which

studies for each aspect of the Act

is reasonably clear and accessible to a

(http://www.lawcom.gov.uk/wp-content/

prudent insurer.

The new Act applies to England, Wales, Scotland and Northern Ireland. Further the Act will apply to any insurance and reinsurance contract governed by the law of England and Wales (wherever concluded), which are entered into, renewed or varied on or after 12 August

uploads/2015/03/lc353_insurancecontract-law.pdf).

However, it is important to understand that this is not designed to create any

2016. The Act’s implementation has

When focusing on credit, political

fall back areas for insurers to dispute or

resulted in a number of changes to the

and security risk placements,

invalidate a claim for non-disclosure of

obligations of insureds and insurers

the Act changes UK insurance

irrelevant non-material information, or any

and is therefore being given due careful

law in three key areas:

gaps in an information pack arising from

consideration, particularly in the absence of any case law surrounding the new Act. In this regard, discussions with and between insurers in the London insurance market regarding the

1. Disclosure and Misrepresentation The Act introduces the duty of disclosure to fair presentation of a risk by an insured to an insurer.

the insurer’s reticence for failing to ask a question prior to policy commencement. Fundamentally, the Act provides a range of proportionate remedies for breach of the duty of fair presentation which are

interpretation of the Act are still ongoing.

The change from duty of disclosure to

linked to what Insurers would have done

In addition to seeking legal counsel,

fair presentation means that, before the

if the risk had been fairly presented. This

our CPS team’s interpretation and

insurance contract is concluded, the

may result in the imposition of different

understanding of the Act has focused on

insured must provide to the insurers




3. Fraud

terms or the proportionate reduction of

The Act looks to clarify the effect of

claims where a higher premium would

fraudulent claims.

have been charged. In circumstances where the insurer would not have entered into the contract on any terms they can avoid the contract and refuse all claims, but must return premium. It is important to note that if the breach of fair presentation is deliberate or reckless the insurer can still avoid the policy, refuse all claims and keep premium. 2. Warranties The Act can be seen to dilute the effect of warranties, which have historic severe coverage penalties for insureds in the event of inadvertent breach or non-compliance. If a breach of warranty is remedied prior to a relevant loss it will not discharge the insurer’s liability under the contract of insurance. The intention is to prevent Insurers from relying on non-compliance with the terms of the policy by the Insured to discharge their liability under the insurance policy, where such non-compliance with the particular term in question could not have increased the risk of loss or bore no relevance to the loss that actually occurred. The Law Commission does not consider it fair that an insurer can refuse a claim on the basis of the Insured’s breach of warranty or other condition in circumstances where those terms are clearly irrelevant to the loss.

Despite this Act passing into law there is an opt-out provision for corporate insureds, however this is not believed to be in the insureds’ favour as the Act is designed

If the insured makes a fraudulent claim

to put the insured in a stronger position

under the insurance policy then the

than they previously had (despite imposing

insurer shall not be liable to pay the

a ‘new duty of fair presentation’). JLT’s

claim. The insurer shall be entitled

understanding from market discussions

to recover from the insured all sums

is that regular purchasers of insurance in

paid in respect of the claim. They may

the political risk and credit marketplace are

treat the insurance as having been

not, on the whole, electing to opt out of

terminated with effect from the time

adopting this act.

of the fraudulent conduct, refuse all liability under the contract in respect of a relevant event, and retain premium paid. However, the Act clarifies that Insurers will remain liable for all legitimate losses suffered before the fraud. In shifting our focus from the technical changes prompted by the Act towards how this may affect credit, political and security risk insureds day to day, JLT is ensuring that all our clients are aware that for any new risks, renewals or policy changes going forward, disclosure of information and representations related to a subject transaction need to be considered in the frame of ‘fair

In the event of an insured deciding to opt-out of subscribing as respects any matter provided within the Act, Insurers have a duty to introduce ‘clear and unambiguous’ language in the policy stating any disadvantageous terms to the Act – if there are any. We shall conclude by highlighting that given the quantity of different legal opinions secured by insurers addressing the Act and the lack of case law, it is not surprising to us that different insurers have varying views in terms of policy language amendments and this should not be cause for alarm.

presentation’. Insureds can be assured

JLT is seeking to promote consistency

that, for the most part, the duty of fair

through our discussions with insurers

presentation is very much in line with

so that a consensus on any wording

their current practices and should not

amendments required to existing

realise any significant additional workload.

polices (if any) and new policies can

However, the nuances do need to be

be reached. We believe this to be the

considered as with any implementation of

prudent approach, rather than advising

law because these would over-ride any

significant changes to policy wordings

policy terms and conditions.

at this time. Our fundamental aim being that throughout these discussions, there is absolutely no dilution of existing protection in any of our policies and that any amendments made are solely for the purpose of strengthening coverage for our clients. 

“The Insurance Act is designed to put the insured in a stronger position than they previously had”


Making Your Terrorism Response Fit For Purpose RAJ RANA Head of War and Terrorism at JLT Specialty As the terrorism threat continues to

market was already including elements

solution in utilizing these newly available

evolve, with the emphasis now on causing

of contingent business interruption cover

products to ensure their risk from such

more loss of life and economic damage

such as prevention of access to premises

events is adequately managed.

than traditional property damage, it

and the emphasis on this evolution is now

raises a question on the adequacy of

greater than ever before.

the protection provided by the traditional sabotage and terrorism polices.

In the event of a Terrorism attack, sadly there is likely to be human collateral

However, insurers are now more

involved as well as property damage and

closely addressing potential gaps in

business interruption. Businesses need

Some aspects of the cover are effective,

the cover, with products providing a

to cover both: the property damaged

particularly in relation to property damage

wider range of non-damage business

and business interruption through a

and business interruption but businesses

interruption cover including loss of

terrorism policy with their people risk

must also consider the consequence of

attraction, threat and active assailant

covered via a kidnap and ransom policy.

bodily injury, liability and other indirect

– without related property damage.

The latter is badly labelled in this instance

effects on their operations. After the Paris attacks, the lockdown in Brussels cost an estimated £350 million in lost revenue.

As usual the challenge is capacity, particularly for larger businesses. The new products are not yet standard

Terrorism policies are now being enhanced

covers offered by all underwriters and at

to respond to these risks. The trigger,

this point it would be difficult to get limits

whether from the private market or state-

over $25-$50 million.

backed insurance pools, has historically always been property damage. It is worth noting that prior to recent events, the

– a kidnap and ransom policy will cover an array of people-related risks, including crisis response in hostage situations such as the Bataclan Theatre attack, as well as any resultant liability and personal accident claims. The eventual aim would be a wraparound solution covering

Whilst a holistic terrorism cover is still

assets, balance sheet and people in a

in development, businesses can find a

single policy, Continued on page 11 



“Businesses need to cover both: the property damaged and business interruption through a terrorism policy with their people risk covered via a kidnap and ransom policy.”

MANAGING THE CRISIS The other key imperative for businesses is to rehearse their response to a terrorist attack. Part of this is simply knowing where people are and how to get hold of them. But it’s also essential to have crisis management and business continuity plans in place and well-rehearsed in order to deal with the complexity of an event. With vast teams of people involved after an attack – from quantity surveyors and architects to security consultants and post-traumatic stress counsellors – it is vital to implement a tightly integrated programme of crisis teams across the business. All responses need to be well prepared, building resilient operations that ensure the business is equipped for any eventuality. It’s also important for both governments and businesses to think creatively. There is a tendency to be consistently wrongfooted because we prepare for the last event, rather than the next event. With several of the new products now available, crisis management fees are part of the offering recognizing the indispensable value and providing expertise before, during and after a terrorist attack. It shows that the market, as might be expected, is rapidly evolving in response to these new risks. 


Africa’s Foreign Exchange Crisis RUTH LUX Senior Consultant CPS Analytics at JLT Specialty Limited

Africa’s foreign exchange (FX) crisis will remain a prominent issue for global markets for the remainder of 2016. The deterioration in export earnings due to suppressed commodity prices and insecurity has led to significantly reduced foreign currency levels in key African economies, including Nigeria, Angola and Egypt. Nigeria FX Reserves (September 2015 - September 2016)

Governments will therefore need to bolster FX reserves and fill gaps in

32,000

operating in the region should take

31,000

50

30,000 29,000

steps to mitigate the threat of currency inconvertibility, non-payment and other

40 30

27,000

credit and political risks.

USD

28,000

In Nigeria, where the energy sector accounts for more than 90% of FX

26,000

20

25,000 10

24,000 23,000

Sep ‘16

Aug ‘16

Jul ‘16

Jun ‘16

May ‘16

Apr ‘16

Mar ‘16

Feb ‘16

Jan ‘16

Dec ‘15

Oct ‘15

Nov ‘15

0

Sep ‘15

USD Million

national budgets. Meanwhile, businesses

60

Date Central Bank of Nigeria FX Reserves Brent Crude Oil Price

Source: Bloomberg/Central Bank of Nigeria

earnings, significantly reduced oil and gas revenues have left the country with an acute foreign currency shortage. Crude exports dropped by more than 20% in Q2 2016, and suppressed oil prices have been exacerbated by a deteriorating security environment in the Niger Delta, which has hampered output. The country officially slid into recession Continued on page 13 


 Continued from page 13 at the end of August 2016, with foreign

GOVERNMENT RESPONSES

naira, which is being traded on the black market at 20% lower than the official rate. In the short term, foreign investors are likely

exchange reserves falling to USD26.2bn,

Governments across Africa are

around five months of imports. Oil prices

responding to currency crises with a

have had a similar impact on Angola,

range of measures. Numerous countries,

where exports of crude oil represent

including Mozambique, Angola and

95% of FX earnings and 40-50% of GDP.

Nigeria, implemented capital controls

Foreign reserves have fallen by around

in 2015 and early 2016 to protect their

30% since 2012, to USD23.6bn.

currencies and FX holdings. Efforts to

Insecurity and political turmoil have also contributed to the FX crisis in a number of African economies. Years of geopolitical and economic turbulence saw Egypt’s FX reserves plummet to USD15.5bn in July 2016, from USD36bn

to remain cautious while the economy rebalances. Inflation is rising, and hit 17.1% in July 2016, its highest level for almost 11 years. As a result the government will need to consider interest rate hikes to enhance foreign exchange flows.

ease pressure in FX markets have also

The implementation of constraints on

culminated in currency devaluations in

foreign exchange has further impacted

a number of countries including Angola,

both domestic and foreign companies

Nigeria, Ghana and Egypt, generating

operating in Nigeria. Since June 2015

inflationary pressures and forcing

businesses have been banned from using

governments to tighten monetary policy.

FX to import 41 categories of goods in

in early 2011, creating severe challenges

On 20 June 2016, Nigeria ended its

in a country which imports almost three

currency peg to the US dollar in a bid to

times as much as it exports. Alongside

open up foreign exchange markets and

this, the black market has flourished, with

stem large-scale capital flight. Whilst the

businesses willing to pay high prices in

move was welcomed by businesses,

order to secure foreign currency.

FX demand still greatly outstrips supply,

a measure that the government hoped would protect the country’s FX position. Meanwhile in June 2016, United Airlines and Iberia halted flights to Nigeria due to foreign currency restrictions which have prevented foreign airlines from repatriating an estimated USD600m in

maintaining downward pressure on the

JLT World Risk Review Ratings

ticket sales in 7 months.

Currency Inconvertibility & Transfer Risk 10

October 2016

9

Country Economic Risk

Sovereign Credit Risk

8

7

P

6

5

P

4

3

War & Civil War

Expropriation

2 1

Contractual Agreement Repudiation

Terrorism

ANGOLA EGYPT NIGERIA

Strikes, Riots & Civil Commotion

1 = Low Risk 10 = High Risk

Legal & Regulatory Risk

P = Under Review

ANGOLA

Low Risk

1

EGYPT

High Risk

10

NIGERIA

Under Review





 Continued from page 13 Angolan authorities also introduced a range of FX controls in 2015, including limits on foreign currency account withdrawals and the prioritisation of access to dollars for certain goods such as oil and food.

FOREIGN EXCHANGE OUTLOOK The FX situation is unlikely to improve significantly in the short term. Global commodities prices will remain

this end Nigeria’s central bank is reportedly planning to ring-fence USD2.5bn to provide loans to non-oil exporters and has set up two export credit facilities to drive economic diversification.

suppressed in 2016, making it likely

The speed of the recovery will also be

The Central Bank of Egypt (CBE) has

that countries including Nigeria and

governed by domestic factors. Nigeria’s

responded to FX market problems by

Angola will look to retain capital controls.

energy sector has experienced severe disruption stemming from escalating militant activity in the Niger Delta region.

“Brent crude is projected to average USD57 per barrel in 2017, which will stabilise the FX outlook in countries reliant on commodity exports.”

On 3 June 2016, militant group Niger Delta Avengers damaged Royal Dutch Shell’s Forcados export pipeline, forcing the company to indefinitely suspend oil exports of 250,000bpd. The group announced a cessation of hostilities in

loosening capital controls and moving

However, there are indications that

August 2016, allowing the government

toward a more flexible exchange-

commodities prices will rebound in the

and international oil companies some

rate policy, culminating in a 12%

medium term. Brent crude is projected to

time to repair damaged infrastructure

currency devaluation in March 2016.

average USD57 per barrel in 2017, which

and boost output. However, the ceasefire

However, these approaches have yet to

will stabilise the FX outlook in countries

is fragile and other militant groups have

significantly boost FX inflows as Egyptian

reliant on commodity exports.

maintained operations, meaning that

manufacturers are struggling to procure dollars to import key materials and machinery, limiting export opportunities. In March 2016, Italian company Italcementi, reported it had been struggling to move USD54.8m in shareholder profits out of Egypt for over a year and had faced difficulties in paying foreign suppliers.

Over the long term, overreliance on hydrocarbons in countries such as Nigeria and Angola will mean that balance of

insecurity in the Delta region will continue to affect the oil and gas sector for the remainder of 2016 and beyond.

payment and FX crises will continue to

Insecurity in Egypt will continue to

threaten these economies. Only structural

hamper the tourism industry and impact

reforms and a serious commitment to

foreign currency earnings. In August

economic diversification will provide a

2016 the country provisionally agreed

sustained solution to these challenges. To

a USD12bn loan from the IMF, which will bolster its FX position in the short term. A USD1bn deposit in the CBE by the United Arab Emirates will provide further relief. Despite these measures, long term macroeconomic challenges abound, and the implementation of reforms agreed with the IMF, such as reducing fuel subsidies, risks sparking civil unrest that would further obstruct economic activity. Security risks of this sort will likely become more evident in affected countries in the coming months as inflationary pressures come to bear, eroding purchasing power and raising costs of living. This will hurt the general population, increasing the risk of political violence in the form of strikes, riots and civil commotion. 


MARKET MOVES

Every quarter we examine the key personnel moves in the market as when our clients purchase a policy, they are not only partnering with an insurance firm, but more specifically, the individual underwriters themselves. Market moves can lead to changes in an insurer’s underwriting strategy, the products it offers, and greater expertise. Clients ought to contact their broker if they wish to understand the impact of a market move on their policy.

AFRICA TRADE INSURANCE AGENCY

BRIT

NOVAE

James Morrell joins from Beazley

Tim Woodhouse joins from Starstone

CHUBB

PEMBROKE

Olivia Wright joins from Talbot

Paul Dobson joins from QBE

CHUBB NORTH AMERICA

WR BERKLEY

Toby Vass has been promoted to run

Christian Hannah joins from Neon

John Lentaigne joins from Brit and moves to Cairo with ATI

ARGENTA Mark Palmer joins from Atradius

ASCOT

Chubb North America

Jessica Burton joins from Coface

ATRADIUS Chloe Luc joins from Coface and Tom

COFACE NORTH AMERICA Fredrik Murer has left Chubb to become CEO of Coface North America

Dylan joins from Allied World Assurance Company (AWAC)

BEAZLEY Richard Hatton moves from broking in Aon to underwriting in Beazley

IGI INSURANCE Joanna Cousins joins from Arch

ZURICH Amy Clark joins from Atradius


JLT Specialty Limited provides insurance broking, risk management and claims

Key contacts

consulting services to large and international companies. Our success comes from

NICK ROBSON

focusing on sectors where we know we can

CEO, Credit, Political & Security Risks, JLT Specialty Limited

make the greatest difference – using insight, intelligence and imagination to provide expert advice and robust – often unique –

+44 (0)20 7558 3643 [email protected]

solutions. We build partner teams to work side-by-side with you, our network and the market to deliver responses which are carefully considered from all angles. As one of the world’s strongest credit, political and security risks teams we help banks, commodity traders and corporations to understand, mitigate and transfer the effects of political and country economic risk, counterparty (credit) risk, political violence and kidnap & ransom. Through a relationship driven, consultative approach we use a systematic methodology to quantify, prioritise and minimise your company’s political risk, security and trade credit exposures.

Africa JEROME FANNING Senior Account Executive, JLT South Africa

Middle East HARRY DOYNE-DITMAS Manager, JLT MEA

+27 11 361 0022 [email protected]

+971 4 369 7880 [email protected]

Asia MARK WONG Managing Director, JLT Asia

North America MATTHEW STRONG Head of Credit, Political & Security Risks, JLT USA

+65 6411 9341 [email protected] Brazil TATIANA MOURA Managing Director, Financial Lines, JLT Brasil +55 11 3192 3348 [email protected] India KETAN KALE Practice Head - JLT Independent +91 22 43401308 [email protected]

This newsletter is published for the benefit of clients and prospective clients of JLT Specialty Limited. It is intended only to highlight general issues relating to the subject matter which may be of interest and does not necessarily deal with every important topic nor cover every aspect of the topics with which it deals. If you intend to take any action or make any decision on the basis of the content of this newsletter, you should first seek specific professional advice. JLT Specialty Limited The St Botolph Building 138 Houndsditch London EC3A 7AW www.jltspecialty.com Lloyd’s Broker. Authorised and regulated by the Financial Conduct Authority. A member of the Jardine Lloyd Thompson Group. Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. Registered in England No. 01536540. VAT No. 244 2321 96. © September 2016 272879

+1 (312) 637 6122 [email protected] Scandinavia ALEX QVENNERSTEDT Partner, Risk Solutions, JLT Sweden +46 8 442 57 38 [email protected]