Amid political uncertainty in Russia, insurance companies are finding a niche.
Stephen Kay's phone has been ringing off the hook. American companies with investments in Russia have been calling him incessantly over the past couple months to ask about insuring against political instability, including the possibility that the Russian government might confiscate their assets.
Kay, the head of political risk insurance in the U.S. for Marsh, a unit of the world's largest insurance broker Marsh & McLennan, sells a specialized type of insurance to companies that want to do business in other countries, but that are worried war or political strife could endanger their investments. Kay's company sells policies that protect against everything from cyber-attacks to hurricanes. But it's political risk insurance that's in demand since Russia invaded Ukraine and annexed Crimea, sparking a tense standoff between Moscow and the West.
The ongoing standoff has put U.S. companies that operate in Russia in a particularly tricky position, as the two sides trade threats of economic warfare and American companies look to cover their Russian assets. Secretary of State John Kerry warned Tuesday that the U.S. could roll out more sanctions for Russia's meddling in Ukrainian politics. After Washington froze the assets of businessmen, politicians, and a bank close to Putin last month, members of Russia's parliament fired back by considering legislation that would allow them to take over American and European companies in Russia.
That's why so many people are calling Kay -- investing in Russia suddenly looks a lot more perilous. It's already the country with the highest level of political risk insurance. Insurers had at least $27 billion worth of exposure at the end of 2013, according to information collected by the Berne Union, a group of trade and investment insurance companies.
Foreign direct investment in Russia jumped in 2013 to $94 billion according a United Nations report, but has been falling since the beginning of this year. Investors have already moved $50 billion out of Russia in the first three months of 2014, which Fitch Ratings said Wednesday puts Russia's already struggling economy at risk.
"We believe the Ukraine crisis is exacerbating a longer-term slowdown in the Russian economy," the ratings firm said.
Unfortunately for Kay, instead of a sales boon, he has a lot of what he calls "uncomfortable conversations." That's because he no longer has any insurance to offer. Once a country is already in the midst of a political crisis, insurers consider it too risky to sell new policies.
"When you're looking for homeowners insurance, it's a little too late to buy the insurance when the house is already burning, right?" Kay said. "The events going on right now in Russia are like a burning fire."
Political risk insurance can cover physical damage, such as to buildings from riots or terrorism, as well as financial damage like a foreign government refusing to pay out a contract or let people move money out of the country because of an economic crisis. If civil war breaks out and a factory is destroyed or new political leaders come to power and decide to nationalize foreign-owned companies, the insurer would compensate the policyholder.
Businesses that want to insure new ventures or assets that are already on the wrong side of what threatens to become a new Iron Curtain have little recourse but to wait for the volatile situation to settle down. It's unclear what proportion of foreign direct investment is insured worldwide. The contracts are private and many companies don't disclose the details. Big multinational companies often buy policies to cover their operations in multiple countries over several years, according to people in the insurance business.
American corporate giants, including General Motors, PepsiCo, Coca-Cola, Boeing, and Exxon Mobil, have substantial investments in Russia. General Motors, which produces SUVs in two Russian factories, declined to comment on the company's use of political risk insurance. "We don't disclose this information for competitive reasons," a spokesman said in an email. Boeing also declined to comment. Coca-Cola, PepsiCo, and Exxon did not immediately respond to requests for comment.
Russian lawmakers haven't moved forward with the idea of taking over parts of Western companies, but numerous countries have seized the assets of foreign firms, usually as part of a domestic economic program rooted in socialism or communism. Russia itself nationalized swathes of foreign industry in the wake of the 1917 revolution. More recently, Venezuela, Bolivia, and Argentina have incurred the wrath of foreign investors by expropriating businesses, especially in the energy sector.
Political risk insurance was created to encourage investment in Europe as part of the Marshall plan to rebuild the continent after World War II. The Overseas Private Investment Corporation (OPIC), a U.S. government agency, still provides insurance to companies that want to invest in projects that aim to achieve development goals, as does an arm of the World Bank.
But much of the political risk market is now private. It's backed by some of the world's largest insurance underwriters like American International Group (AIG), Zurich Insurance Group, and ACE Group, for whom it is a small part of their business. Because they also underwrite insurance policies on everything from life insurance to workers compensation, the giant companies generally aren't threatened by any one political event.
Curtis Ingram, another broker who sells political risk insurance at Aon, said it's much harder to quantify political risk than other types of insurance that can rely on historical statistics to gauge the future.
"It's just not life insurance or auto insurance or even windstorms," said Ingram, vice president of Aon Risk Solutions' political risk practice. "It's profoundly unpredictable."
The underwriters can also end up owning parts of companies that they insure, which can help them recover some of the costs of paying claims. If a government decides to take over part of a foreign-owned business, the insurance company would compensate the original owner and then take over ownership of the factory or oil field that was expropriated. The insurance company can then continue to press the country's leaders to return the asset or give them compensation. In 2012, insurers reported recovering $51 million from holding onto expropriated assets, according to the Berne Union data, but in 2013 they reported zero. It all depends on whether the government that took the assets will agree to settle the dispute.
The giant insurance companies are often in a better position than investors to play the long game and wait to see if the political winds change. But the odds of that happening in Russia are still unknown.
"Nobody's got a crystal ball; nobody can really foresee one year out," Kay said. "The Russian crisis confirms that. Nobody really saw that coming."