Tusekile KibondeResident Underwriter – Tanzania

November 2015Dar es Salaam, Tanzania

Introduction to Political Risk Insurance & Underwriting

“Compared to 2011, Africa today seems more risky than during the Arab Spring.”

A Key Question: What are some of the Challenges for

Investment?

Z$1

.9 m

● Investment Risks (government actions affecting foreign direct investment)

● Regulations from the country that limits where, when and how business is done

● Access to finance

● Non-acceptance of goods

● Currency issues on cross border transactions

● Non-payment for goods supplied on credit

● Lack of supporting infrastructure, ineffective legal systems, and interest rate increases

● Political Violence, Terrorism & Sabotage

Possible Solutions

Z$1

.9 m

Focus on Assets & Receivables

Overview of Political Risk Insurance

Definition

● Political Risk Insurance is a type of insurance that protects investments, projects, goods and contracts against any unfair political action or inaction by a government that would cause damage, financial loss or business interruption

● It is also known as Investment Risk Insurance

● Provide investment insurance to commercial bank lenders and private sector equity investors

What is Investment Insurance?

Investment Insurance provides protection against specific non-commercial risks including:

● Currency conversion and transfer restrictions

● Expropriation – outright and creeping

● Political Violence – asset damage or inability to operate

● Non-Payment by sovereign and public borrowers

Our insurance helps investors, lenders & traders improve the risk profile in member states. Many need this insurance as a condition of internal approvals in many developing countries.

Types of Investment Insurance (1)

Currency conversion and transfer restrictions

●This cover protects against losses caused by currency transfer restrictions

●Cover applies to the interruption of scheduled payments or repatriation of capital or dividends due to currency restrictions imposed by the host government

Expropriation – outright and creeping

●Also referred as Confiscation, Expropriation, and Nationalization

●This cover protects against losses caused by various acts of expropriation

●Cover usually applies to outright confiscation of property or funds

Types of Investment Insurance (2)

Political Violence – asset damage or inability to operate

●Cover protects against losses caused by war, civil disturbance, or terrorism

Non-Payment by sovereign and public borrowers● These can be categorized in three forms:1. Contract Frustration covers:

– sale/contract is frustrated due to specific political risk perils (e.g. political violence) thereby causing the exporter to lose its sunk costs and profit

– payment risk of the sovereign buyer to the extent the supplier has completed its obligations under the contract and the sovereign buyer has acquired a payment obligation to the supplier.

.

Types of Investment Insurance (3)

2. Arbitration Award Default covers:– the sovereign (or sub-sovereign) entity has payment

obligations under a contract with a domestic entity in which the insured has an ownership interest, and the insured is seeking coverage to protect that investment

– compensation would cover the failure of the sovereign to pay

an arbitration award.

3. Non-payment of Sovereign (Sub) Obligation covers:– protects the lender against losses resulting from a

government’s failure to make a payment when due under an unconditional financial payment obligation or guarantee, because of inability or unwillingness to pay.

Underwriting of Political Risk Insurance

13

Underwriting Sovereign Payment Risk

Evaluation is based on:• Obligor – Sovereign or Sub-sovereign• Review of the Agreement/Contract• Allocation of Funds for the project• Commitment/Support from the Sovereign• Country Risk Analysis

• Government/Political Stability• Economic Performance – Inflation,

Exchange Rate, National Debt, Economic policies

• Sector Risk Analysis - Regulations

14

Key Policy Features

Tenor: Up to a maximum of 10 years

Size (Gross Exposure): Sovereign Risk: Up to US$150 million Political Risk: Up to US$100 million

Indemnity - Insured Percentage: Up to 100% (Political Risks)

Waiting Period: 180 days

Pricing & Payment

Key Questions

Pricing:Price to risk, depends on perils being insured, country risk, tenure and bank’s margins among others 1.5% to 3.2% p.a. Minimum Premium:

US$ 3,000

Flexible Premium Payment: Pricing/premium rate. Payable up front, annually. Other options can also be negotiated

Case Examples

Main Political Risk Covers

$3.1

m

Zam

bia

$1.9

m

$1.3

Rw

and

a$1

.1

Ken

ya$7

49

Ug

and

a$3

49

Bu

run

di

$130

US$ 9 million

PRI – Expropriation, Currency Inconvertibility, War

A loan to part finance the establishment of a new hotel in Kampala

Insured: A South African Bank

Country: Uganda

US$ 12.5 million

PRI – Expropriation, Transfer Restriction

A US$ 12.5 million investment in the telecommunication sector

Insured: Foreign Investor

Country: Burundi

US$ 26.6 million

PRI – Loan Cover (Expropriation)

Loan for expansion of a cement plant

Insured: A Kenyan Bank

Country: Rwanda

US$ 250 million

PRI – Sovereign Non-honouring Cover

A syndicated loan to facilitate infrastructure development by the government

Insured: An International Bank

Country: Tanzania

Others

$3.1

m

Zam

bia

$1.9

m

$1.3

Rw

and

a$1

.1

Ken

ya$7

49

Ug

and

a$3

49

Bu

run

di

$130

US$ 167,000

Sovereign Non-Payment Cover

Contract for the supply of uniforms to a government department

Insured: A Kenyan Company

Country: Malawi

US$ 150 million

PRI – Sovereign Non-honouring Cover

A US$ 350 million participation on an import finance facility for petroleum products

Insured: A Regional Bank

Country: Zambia

US$ 6.0 million

PRI – Sovereign Non-honouring Cover

Upgrading of Telecommunication systems for a government department

Insured: A Tanzania Company

Country: Tanzania

$1.75 million

Sovereign Non-honouring Cover

Non-payment on a road project in Nairobi, Kenya. Bank providing facilities to the contractor with ATI support

Insured: Kenya Contractor

Bank: A Kenyan Bank

Country: Kenya

Unlocking your Potential

Areas of Opportunity

● Manufactures/traders who sell to GoU or gov’ts in member countries

● Contractors with GoU, Parastatals & gov’ts in member countries

● Syndicated loans to government

● Cross border loans

● Lines of credit from international banks

ATI HeadquartersKenya-Re Towers | Upperhill, Nairobi

underwriting@ati-aca.org

ATI Tanzania Office1st Floor, Private Sector Hs | Mwaya Road

Dar es Salaamtanzania@ati-aca.org

ATI Uganda OfficeWorkers House, 9th Floor

Southern Wing Plot1 Pilkington Road | Kampala uganda@ati-aca.org

ATI Zambia OfficeKwacha House Annex | Cairo Road

Lusakazambia@ati-aca.org

ATI ContactsAfrica’s Export Credit Agency

www.ati-aca.org

Questions?