An industrial asset is depreciated over fifteen or twenty years. The London private market commonly writes political risk on a multi-year, non-cancellable basis, often for three years and at times beyond seven, but many investors still hold a one-year renewable policy, and on that policy the gap is no administrative detail. It means that protection for a long term investment rests on a succession of annual decisions taken by a third party under no obligation to repeat them. The insured believes it holds cover; it holds cover for this year, and an expectation for the following ones. While nothing happens the distinction stays theoretical. It becomes the whole subject the day the country starts to deteriorate.
The mechanism making that gap dangerous is simple and counterintuitive. An insurer does not withdraw from a country at random: it withdraws when its assessment of the risk rises, that is exactly when the protection becomes useful. Non renewal is therefore positively correlated with loss, the reverse of what one expects from cover. An annual policy protects well against a sudden event in a calm country, and badly against a gradual deterioration in a country that is slipping, whereas it is the second configuration that dominates the subject.
One must then look at what the market offers in return, distinguishing three objects that get confused. The firm multi year policy, where the insurer commits for several years with no right of cancellation other than non payment of premium: it is the only real answer and it is paid for. The long term agreement, which commits to an intention to renew on predefined terms and almost always contains an exit in the event of a material change in the risk, which is precisely the circumstance that worries. And the annual policy with tacit renewal, which protects only against forgetfulness. These three objects present themselves in similar vocabulary and are not of equal value.
Then comes the point that gives this module its interest, and it belongs to financing rather than to insurance. A project loan almost always requires the borrower to maintain political risk cover in force, with an approved carrier and a minimum amount, for the whole life of the loan. That undertaking is a contractual breach if not met, in the same way as a financial ratio. Yet the borrower does not control the market: if insurers withdraw from the country, it cannot perform, and it finds itself in default on its loan for a reason outside its control. A country's deterioration thus produces two simultaneous effects, a loss of protection and a banking default, at the precise moment cash is tightest.
That defect is badly handled in practice because each of the two worlds thinks it belongs to the other. The risk director treats market availability as an external given; the finance director treats the insurance undertaking as a formality kept by insurers. Nobody asks what happens if cover is no longer available at a reasonable price, and the clause stays drafted as an obligation of result. The drafting that answers the problem exists: it turns the undertaking into an obligation of means subject to commercial availability, with a lender consultation procedure rather than an automatic default. It is negotiated when the financing is signed and practically never afterwards.
A second asymmetry deserves stating because it decides price. A multi year commitment costs more than a succession of annuals at the going rate, and the comparison looks unfavourable while one compares premiums. It reverses as soon as one includes what the annual does not carry: the right to withdraw at the worst moment, unlimited rate revision, and the risk of default on the loan. What is bought in a multi year policy is not extra cover, it is the removal of an option the insurer holds and will rationally exercise against the insured. The price of an option does not appear on the premium line.
Finally, duration is negotiated in layers rather than as a block, which often makes the thing feasible. Few private insurers commit firmly for fifteen years, many accept three, often more and at times over seven, and a public carrier accepts fifteen. The construction that works therefore mixes the two, with a long base at a carrier that grants it and a renewable top up of limit from the private market. Exposure to non renewal then moves onto the upper layer, the one that responds least often, which is exactly where one wants it.
Three checks close this chapter, and all are made before signature. Read the insurer's cancellation right rather than the stated term, since a five year policy cancellable annually is a one year policy. Compare the term of the cover with the term of the loan and not with the accounting year, since it is the loan that carries the undertaking. And have it written down what happens if the market withdraws, because that sentence is the only thing protecting against a default the borrower will be unable to avoid.
A project company has operated a desalination plant in a Gulf of Guinea country since 2021, financed by a 310 million euro loan over fourteen years. The loan agreement requires political risk cover of at least 250 million to be maintained with a carrier rated A or better, and makes failure to do so an event of acceleration after a thirty day remedy period. The current policy, annual, expires on 31 March 2026. On 2 March the broker reports that the incumbent insurer is not renewing, that two markets approached have declined the country since a failed coup in January, and that a single carrier offers 150 million at three times the previous rate. What must be done, in what order, and what should have been written in 2021?
The urgency is not insurance, it is the loan, and getting the order wrong costs the company. On 31 March cover falls to 150 million against 250 required, the remedy period expires on 30 April, and acceleration of 310 million would render the project company insolvent immediately, long before any political loss occurs. The first step is therefore to write to the lenders before the expiry and not after the breach: a temporary waiver requested by a borrower bringing a documented file, two written market declines and a partial offer, is obtained far more easily than forgiveness sought by a borrower already in default. The second step is to take the 150 million available despite the rate, because partial cover demonstrates good faith performance of the undertaking and transforms the discussion with the banks: the borrower has not stopped insuring, the market has stopped selling. The third is to seek the missing capacity where it still exists when the private market withdraws, that is from public and multilateral carriers, whose appetite does not follow the same cycle and whose processing, though long, can start at once. One must then say what should have been written in 2021, because that is the real lesson and it no longer helps this file. The insurance undertaking was drafted as an obligation of result over a market the borrower does not control, which guaranteed a default the day the country deteriorated, that is the day everything else went wrong too. Protective drafting makes the undertaking subject to commercial availability, provides for lender consultation rather than automatic default, and aligns the term of the cover with the term of the loan rather than with the accounting year. Finally, an annual policy on an asset financed over fourteen years was the real structural defect: an insurer's right to withdraw is always exercised when it hurts most, and that is exactly what has just happened.
- 01An annual policy on a fifteen year asset gives not cover but cover for this year and an expectation for the following ones.
- 02Non renewal is positively correlated with loss: the insurer withdraws when its assessment of the risk rises, that is when protection becomes useful.
- 03A firm multi year policy, a long term agreement and tacit renewal present themselves in similar vocabulary and are not of equal value: read the cancellation right, not the stated term.
- 04The loan requires maintaining cover the borrower cannot produce if the market withdraws: the clause must be an obligation of means subject to commercial availability.
- 05A multi year policy buys not extra cover but the removal of an option the insurer will rationally exercise against the insured, and the price of an option does not appear on the premium line.