Table II Projects and Programs | Private Sector Development | List of Project Datasheets

Country: Regional

Title: Leveraged Political Risk Insurance Facility for Imports

Objective: Address the barriers that political risk creates for increasing trade volumes and catalyze commercial risk insurance for trade

Description: The proposed facility would operate in the following manner:

Donor and World Bank funds would be earmarked for each country participating in the facility.¹ The amount allocated to each country would be based on expected demand, based on the results of a demand survey.² These funds would be placed in a trust account to back-up insurance policies and could only be used to pay valid claims.

The types of trade transactions that could be covered include:

• Sale of goods, usually on credit terms
• Financial lease
• Operational lease
• Import of capital equipment for use by the insured in carrying on its business
• Import of goods to stock for sale
• Import of goods for processing and export
• Loans and prepayments by foreign lenders to local enterprises
• Obligations of confirming banks in respect of documentary credits issued by local banks
• Performance bonds

The types of risks that the facility could cover include:

• Government Performance Risks, such as imposition of exchange controls, expropriation, arbitrary cancellation of licenses, retroactive or arbitrary increases in import and export taxes
• Inconvertibility or Inability to Transfer
• War and Civil Disturbance
• Other risks specific to the country (e.g. in Bosnia and Herzegovina, the risk of a United Nations embargo is covered)

An insurance broker would be selected to assist in the negotiation of the terms of the facility, including the leveraging mechanism, with a syndicate of private risk insurers, and assist in the administration of the facility. This Facility Broker would be specialized in Political Risk and Trade Credit Insurance and would be selected using a transparent tender process.

It is likely that the outcome would resemble the structure that was recently negotiated for the facility in Bosnia and Herzegovina (BiH). In this case, the private risk insurers would issue policies in their name and would have access to the funds placed on trust to pay valid claims. A claim in Country X could only be paid using the funds earmarked for that particular country. The agreement would include a maximum leverage ratio, say 3 to 1, which would mean that the private insurers would be bound to issue policies for up to three times the amount of funds placed on trust.³ If donor funds were to be exhausted, private insurers would be liable for claims from their own funds. This structure is similar to a mechanism known as excess of loss in the private market.⁴

Even though the syndicate of private risk insurers would issue insurance policies, local implementing agencies in each country would play a key role in administering the facility and selling the guarantees. These agencies would be responsible for marketing the facility within their country. They would receive applications for cover and process them before passing them on to the insurance broker/syndicate. The agency would issue Non Binding Indications to and negotiate the terms of the insurance with applicants. The agency would be responsible for verifying that the transaction to be covered was in accordance with the rules governing the facility, which would be spelled out in a detailed operations manual.⁵

A formula would be agreed upon to share insurance premiums between the local implementing agency and the private insurers.

These local implementing agencies would need to be identified (emerging export credit agencies, exim banks) or newly created. They would need technical assistance to train staff and assist them in the early stages of implementation.

Whilst it is proposed that each participating country have its own scheme with its own separate capital, it is also possible to have one pool of funds with participating countries accessing the facility on agreed terms with safeguards against over utilization by one or more country. If one scheme were preferred, it could be administered by the World Bank as trustee on agreed terms.

Preparation Status: A leveraged political risk insurance facility has already been developed in BiH under the World Bank-financed Emergency Industrial Restart Project. A similar approach is being adopted for facilities under preparation in FYR Macedonia, Kazakhstan and Russia and a regional facility under preparation in Southern and Eastern Africa involving potentially nine countries. The concepts and structure used in Bosnia and Herzegovina and proposed in other countries would be introduced in all South Eastern European countries that would request support from Donors and the World Bank to develop a leveraged political risk insurance facility.

Rationale for Donor Support: Donor funds are needed to back-up insurance policies and provide comfort to the private insurance market in order to participate in the leveraged facility. Without donor and World Bank participation, the participation of the private market would be unlikely.

Amount Required: These amounts are estimates that would have to be verified by conducting a demand survey and testing the results of the survey with political risk insurance brokers.

Albania Euro 15 million (Euro 10 million already allocated under the World Bank-financed Private Industry Recovery Project)

Bosnia and Herzegovina Euro 20 million (funds already allocated under World Bank and donor financed Emergency Industrial Re-Start Project)

FYR Macedonia Euro 10 million

Croatia Euro 10 million

Bulgaria Euro 10 million

Romania Euro 15 million

In the event of a shared scheme, the total capital required should be significantly less, approximately Euros 30 million.

Financing Plan: Countries would be expected to commit to the scheme within calendar year 2000. Disbursements would take place progressively during 2001.

Borrower/Financial Beneficiary: The Borrowers/Financial Beneficiaries would be the participating countries. The final beneficiaries would be the enterprises that receive the benefit of the financial assistance covered by political risk insurance.

Major Sector/Project issues: None

Gerhard Pohl (1-202) 473-2979
World Bank

Lloyd Edgecombe (1-202) 458-5982
World Bank

Marie Sophie Tar (1-202) 473-5790
World Bank

¹  The proposal is to have separate pools of funds for the different participating countries as the risk profiles of the participating countries are different (e.g. Albania vs. Croatia for example) and some countries may not need or want a political risk insurance facility.

²  The demand survey would target companies doing business or interested in doing business in the region, as well as commercial banks. Information would be gathered from insurance brokers who get requests for coverage on a daily basis in order to supplement the survey.

³  The leverage ratio could vary from country to country based on different levels of perceived risk.

⁴  Please refer to the attached flow chart.

⁵  For example, the agency would have to verify that the transaction would lead to productive activity in the country, that the length of the credit being covered is appropriate based on international practice, that applications are dealt with on a first come first served basis, that environmental requirements are addressed, etc.