Every broker worth his/her salt has a good sense about risk assessment, but taking those skills to the international stage is a whole other ball game – and one that commercial clients who travel abroad depend on to ensure they have the proper coverage and safety.
Stuart Bergman, the assistant chief economist and director of the economic and political intelligence centre for Export Development Canada, knows the value of risk-assessment model when it comes to political risk insurance abroad.
“We pride ourselves in staying as current as we can be, and we review our models on a regular basis,” Bergman told Insurance Business. “We have a good track record, and our models are extremely robust. We have set a pretty high standard for some of the other risk assessment shops that are out there.”
EDC is a crown corporation that provides insurance and financial services, bonding products and small business solutions to Canadian exporters and investors and their international buyers.
Investors’ demand for insurance against political risk is on track to match last year’s record, states a recent World Bank report, as instability persists in the Middle East and disputes in Latin America erode confidence.
“Demand for political risk insurance continues to be driven by concerns related to general market turbulence,” the report states, “including the still-unfolding Arab Spring, high-profile expropriations, persistent resource nationalism, capital constraints, and regulation.” (continued.)
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Investment insurance for developing economies by a group of the main public, private and multilateral providers reached $45 billion by mid-2013, according to the bank’s Multilateral Investment Guarantee Agency unit. For all of last year, issuance totaled $88 billion even as foreign direct investment to the region fell 6 percent
For EDC, up to date and accurate risk assessment models are crucial for Canadians conducting business in global hotspots.
“We support Canadian direct investment abroad as well as foreign sales by Canadian companies. Much of our business is done in partnership with other financial institutions and through collaboration with the government of Canada,” says Bergman. “The demand is pretty good for political risk insurance, and that tends to come in waves, depending on what is happening in the global environment. Oftentimes, especially during periods of heightened global volatility, companies feel the need to have coverage. In some cases, it is required by the banks that they are engaged with, even before they can secure financing.”
And political unrest and uncertainty seems to be here to stay, he points out.
“These days, there is no shortage of politically motivated events that can impact Canadian business interests abroad,” says Bergman. “So that affects demand for coverage.”
As a crown corporation, EDC isn’t set up to compete in the private sector, but to complement coverage, says Bergman. (continued.)
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“We’re not looking to compete with private sector providers. We have a partnership preferred philosophy,” he says. “Our mandate is to fill market gaps. For example, where companies are having a hard time securing coverage, that is where we would come in, to ‘top up’ with additional coverage that the private sector isn’t willing to take on.”
Bergman’s wheelhouse of talent exists in global macro-economic and political risk assessment.
“What my department does is provide in-house consulting to our underwriters on specific risks, when a transaction comes through the door,” he says. “But before that, we contribute to EDC’s position in markets. We help define our posture in the market, and provide guidance on what the risks are, which we should be willing to take, and how to mitigate some others.
“Much of this advice is grounded in a number of different risk ratings that we produce in-house – including sovereign credit ratings, political risk ratings, market-specific commercial obligor credit rating ceilings, and some others.
Citing the example of Greece, Bergman says that rating models are constantly undergoing scrutiny, and tweaking to ensure that accurate measures are there.
“We are constantly reviewing our methodological rating criteria, recalibrating or completely revamping them as the market dictates,” he says. “A new aspect that we’re considering is how to reduce the weight on one particular element that carried quite a bit of weight in the past. (continued.)
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“Take overall GDP per capita. We found that previously the industry weighted pretty heavily the GDP per capita component,” continues Berman, “this is a result of regression testing carried out over the last 30 years or so, which found no instances of sovereign defaults among so-called developed markets.”
By using those models, Berman points out, many people underestimate the possibility that developed market governments could default on their debt.
“The fact that there were no instances in history, up to now, of high income country sovereign default helps support the ratings of some of these governments that are carrying heavy debt burdens,” he says. “What we have learned over the last few years is that this is clearly not the case, and so we have to go back and review our methodologies”
