Political and credit risks have long existed outside the traditional bounds of insurance. But as global finance becomes more exposed to geopolitical volatility and longer-dated transactions, these risks are no longer peripheral. As Caroline Coulson (pictured), chief underwriting officer at Pernix Specialty, explains, political and credit risk insurance is structurally different from standard lines, and increasingly central to complex financial risk management.
Coulson said these risks require “a different mindset”, they are financial and sovereign in nature, often bespoke, and do not follow the typical annual cycle of renewals.
Unlike mainstream insurance, where risk is pooled and renewed annually, credit and political risk insurance is embedded directly into the economics of individual transactions.
For Coulson, three characteristics set political and credit risks apart: purpose, structure and clients. “Standard insurance, like property and casualty or life and health, protects against physical or liability losses,” she said. “CPRI [credit and political risk insurance] covers intangible financial and geopolitical risks. And most policies are new and non-renewable, which makes them harder to price and underwrite.”
CPRI tenors can run from one to 10 years, and sometimes up to 25 years for large project finance deals, requiring underwriting decisions to be made deal by deal rather than across a broad portfolio.
Coulson said underwriters look at the structure of the underlying transaction, whether a loan, bond or trade contract, and assess the creditworthiness of the borrower. They are pricing based on the deal economics: funding costs, bank margins and insurance premium tax. If the economics do not work, she added, the client will not buy insurance.
Clients are also different. “Rather than individuals, who are typically the buyers of standard insurance, our clients are banks and financial institutions,” she said. “We also insure multilaterals and multinational corporations, as well as public and government agencies, such as export credit agencies, and also traders.”
Claims, too, are more complex. “They often involve complex financial analysis and political negotiation,” Coulson said.
Rising market interest rates, along with regulatory pressures, have accelerated changes in how transactions are structured.
“One trend we’ve seen is the rise of repack structures,” said Coulson. “Banks are our main clients, and many are commercial banks that have to get funding from elsewhere. In a high interest rate and competitive financial environment, those funding costs have gone up. They’re making less money on the deal and have less room for insurance.”
In a repack structure, a special purpose vehicle issues two notes, one insured and one uninsured, allowing banks to retain some exposure while reducing funding strain.
“The investor purchases the insured note and funds the transaction whilst benefiting from the insurance cover. The bank holds the uninsured note and remains the lender of record. We like them to keep some ‘skin in the game’ so our interests are aligned,” she said.
Initially, the market was cautious. “I think our market was a bit nervous around it because of questions about how these structures work in a loss scenario,” Coulson said. “But largely because of the high-interest rate environment and demand from banks for alternative funding solutions, that has changed.”
Coulson said lenders’ political risk cover is evolving in structural ways. The old model - covering a discrete expropriation decree or sudden war - is being supplemented by policies responding to creeping regulatory and hybrid warfare risks.
Today, she said, policies are written to cover more than physical damage, including losses caused by sanctions, secondary sanctions, currency inconvertibility and sovereign non-honouring of arbitration awards tied to deteriorating diplomatic ties.
Coverage is extending deeper into what she described as the “grey zone of regulatory attrition and geopolitical weaponisation of debt”, although it is also becoming more selective, shorter-term and increasingly reliant on public-private risk sharing.
Preferred creditor status has long been “a cornerstone of the international financial architecture”, Coulson said, but that norm has been challenged, particularly by China.
She pointed to Zambia’s 2020 sovereign default, where China declined to participate in a traditional debt relief framework. “Preferred creditor status was publicly and directly challenged,” she said. For the market, she added, that status was “like a halo” - allowing insurers to accept lower premiums and longer tenors because multilaterals were expected to be paid. That assumption is now in question.
Geopolitical volatility is also driving demand for traditional political risk cover. “Russia’s invasion of Ukraine has already resulted in market losses, and there will be many more,” Coulson said. “It’s estimated there is about 10 to 15 billion U.S. dollars of exposure in Russia and Ukraine at the moment.”
As risks become more complex and longer-dated, clarity around policy response is critical.
“On the non-payment side, I would say it’s pretty clean-cut,” Coulson said. “The wording states that it is non-payment by the borrower, within the terms of the insured contract, for any reason whatsoever, save for a few exclusions in the policy.”
Political risk claims are more nuanced. “Whether something is defined as terrorism, political violence, or civil unrest can completely change which market responds,” she said.
Experience therefore matters. “This market is very much a relationship-driven market,” Coulson said. “Our clients don’t have to buy this product. They can sell down in the secondary market, syndicate to other banks, or buy a credit default swap.”
Underwriters also focus on alignment. “We require our clients to hold a piece of the loan or transaction unhedged and uninsured,” she said. “If it goes wrong, they have an interest in sorting it out.”
Repack structures, fund finance and SRT transactions were not mainstream five to ten years ago, Coulson said, but now they are. Political risk wordings have adapted too - what used to be three-point cover is now ten-point.
“Yes, the risks are changing,” she said. “But that’s what this market is built for.”
