NEW YORK--Insurance for political risk will rise in cost and become more difficult to obtain as industries such as oil are threatened with nationalization, according to Aon brokerage analysts.
Roger Schwartz, senior vice president of Aon trade credit and political risk practice, said the net result of the nationalization threat is that coverage for political risk will become more expensive or capacity could dry up for industries that are under direct threat.
"The inclination of the underwriting market is to shut down, at least in the near term," he said during a press conference held here yesterday to discuss the release of Aon's fourth annual Political and Economic Risk Map for 2007.
Bryan Squibb, managing director, Aon Trade Credit, noted that not all products would be affected and the application of political risk coverage will vary from product to product. He said the risk is not limited to nationalization, but could also include discriminatory taxes, such as a windfall profit tax, on select products.
"Certain industries in certain countries have different vulnerabilities," added Mr. Schwartz.
Seventeen countries on the Aon map showed a decrease in political risk and received upgrades this year, but there are more appropriation icons on the map to reflect the new reality, said Sam Wilkin, senior consultant for Oxford Analytica, a geopolitical risk consulting firm working with Aon.
Two countries, Libya and Sudan, received downgrades. The decreases in risk areas, Aon said, were the first in three years.
Mr. Wilkin said the most surprising thing about 2006 was the return of nationalization over oil commodities. The prime example is Venezuela and Bolivia, where the nation's presidents recently moved to take state control of multinationals' assets.
He called it a return to the Cold War era, with calls for a return to socialism after decades where many corporations had thought the practice had disappeared, surprising them.
"Nationalism was once a threat to multinational investors," said Mr. Wilkin, noting that nationalization claimed 20 percent of U.S. direct investment during the 1970s.
The reason for the development of nationalization today is twofold, he pointed out. One, commodity prices are high; and two, new global players allow for governments to seize the assets and find their own markets and managers to run those assets.
What is different this time around, he noted, is talk about compensating those companies for the seizure of their assets, though questions remain if that compensation will amount to a fair market price for those assets.
He noted that should the price of oil drop, it would probably end the desire to nationalize the oil companies.
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