Aon Sees Elevated Political Risks in Half of Top 50 Economies

WASHINGTON, Jan 16, 2008 (A. M. Best via COMTEX) -- AOC | news | PowerRating | PR Charts -- Heightened political and economic risks remain a concern for international businesses and the underwriters who service them, in 25 of the world's 50 largest economies and six of the top 15, according to the 2008 political risk map produced by global insurance broker Aon Corp.

Produced since 1993 by the Aon Trade Credit Global unit, this year's map assigned ratings to 209 countries and territories, incorporating data from geopolitical consultants Oxford Analytica, Aon's own analysts, and global underwriting markets, according to Bryan Squibb, managing director of Aon Trade Credit.

In an interview with BestWire, Squibb said the map is intended to serve as a "footprint around the world," allowing Aon clients to make better judgments about markets they have investments or operations.

"The insurance really follows the evaluation," Squibb said. "We think it's the wrong way to approach our clients to say we have a risk somewhere in the world, can we insure against it? Our approach tends to be: Let's evaluate the risk, let's look at the values at-risk, let's look at what that activity is...It's wrong to look to the insurance market and just look for a simple solution. The answer, we think, is to do the homework first, to undertake the analysis, and then approach markets appropriately."

Four countries saw year-over-year increases in their levels of political and economic risk, with Belarus, Yemen and the West African nation of Guinea Bissau moving to the "high" risk category from "medium-high," while Cyprus moved to "medium" from "medium-low." That compares with 11 countries that saw upgrades in their ratings. Gabon, Ghana, Madagascar, Mauritania, Peru, Jordan and Saudi Arabia were moved to the "medium" category from "medium-high"; Namibia, Mexico and Israel were moved to "medium-low" from "medium"; and Albania was notched down to "medium-high" from "high."

Squibb cited Mexico, Peru and Brazil among the countries to make the greatest progress, particularly noting recent oil exploration successes and the lack of a drought this past growing season as driving Brazil's move toward stability. Squibb also saw relatively stable futures in Russia, India and China, a quartet generally grouped with Brazil as the "BRIC" nations, representing the world's fastest-growing major markets.

"India is generally stable, although there's talk on the horizon about some signs of nationalization there, and generally we don't feel it will necessarily affect investments," Squibb said. "(In) China...Macau, Hong Kong and Taiwan are starting to lean towards the mainland. Elections in Taiwan indicate the leader there wants to work closer, so the promises that the Chinese have made about not restricting trade there have actually come through."

Iran and Pakistan were rated the riskiest places in the world in which to do business, presenting risks in all nine categories tracked by Aon -- economic; exchange transfer; strike, riot and civil commotion; war; terrorism; sovereign nonpayment; legal and regulatory; political interference; and supply chain vulnerability.

The mapping of supply chain risks included the international threat of piracy, which has proven a particular problem around the straights of Indonesia, according to Sam Wilkin, a senior consultant with Oxford Analytica. Speaking during a presentation at Washington's National Press Club, Wilkin noted a trend toward innovations in the ability of the insurance industry to deal with the risk of piracy.

"Piracy is not just the risk of taking the goods from the company, but it can disrupt the company's supply chain because it happens to somebody's supplier," Wilkin said. "Increasingly, political risk insurance has changed in the past few years, and is now able to actually address those kinds of issues that are a few steps removed from the company involved."

This year's map also introduces a risk index of 137 emerging markets based on their exposure to the global credit crunch, including each country's economic and debt vulnerability, which was topped by Latvia, Turkey and Hungary.

"The general fear is that consumerism will diminish in the U.S., and that could affect certain countries," Squibb said. "The one (figure) to watch would be, with GDP growth coming down from 3.8% in 2007 to 3.0% this year, clearly there is a direct correlation between business failures and a lowering of GDP, and I would look out particularly on our economic credit risk crunch map for an increase in business failures globally."

Wilkin also noted the somewhat related risk of expropriations and nationalizations, which have grown in countries like Venezuela, Russia, Ecuador, and Chad. Wilkin expressed concern that the recent trend might be a replay of the 1960s and 1970s, when state-forced expropriations claimed between 15% and 20% of all U.S. overseas investment.

"A lot of people say that there's an ideology of state economic nationalism that is spreading around the world, but that's not what's going on here," Wilkin said. "These countries all have something in common, and what they have in common is that they are all resource-exporting countries, commodity-exporting countries -- oil, minerals -- and with commodity prices up, the deals that looked pretty good both to foreign investors and host governments a few years ago, don't look good anymore. The host governments are moving to act to make the deals better for themselves."

[Listen to the interview with Squibb in its entirety at www.bestdayaudio.com]

(By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com)

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