From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber:Chinese University of Hong Kong; date: 06 January 2016

Contenttype: BookContentPublishedinprint: 15November2012

Product: OxfordScholarlyAuthoritiesonInternationalLaw[OSAIL]ISBN: 9780199651795

IXPoliticalRiskInsuranceFrom:PrinciplesofInternationalInvestmentLaw(2ndEdition)RudolfDolzer,ChristophSchreuer

Subject(s):SettlementofdisputesOverseasPrivateInvestmentCorporation(OPIC)InternationalorganizationsMultilateralInvestmentGuaranteeAgency(MIGA)LawoftreatiesBITs(BilateralInvestmentTreaties)InternationaleconomiclawInsuredsviolationoftheinsurancecontract

From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber:Chinese University of Hong Kong; date: 06 January 2016

(p.228)IXPoliticalRiskInsuranceTheriskfortheinvestorinherentinmajorinvestmentprojectshasledtotheevolutionofamarketforinvestmentinsuranceschemes. Thefirstphaseofinsuranceprogrammescommencedinthe1950sandwasentirelydominatedbyinsurersrunbynationalgovernments,whichsoughttopromotetheoutgoinginvestmentsoftheirnationals.IntheUnitedStates,theAgencyforInternationalDevelopmentcarriedoutthetaskuntiltheOverseasPrivateInvestmentCorporation(OPIC)tookoverin1971.Intheearly1970s,privateinsurersenteredthemarket,beginningwithLloydsinLondonandtheAmericanInternationalGroup(AIG)inNewYork.In1985thememberstatesoftheWorldBankdecidedtoestablishaninternationalorganization,theMultilateralInvestmentGuaranteeAgency(MIGA),forthesamepurpose.TheInterArabDevelopmentBankischargedprimarilywithunderwritinginvestmentinsuranceontheregionallevel.Thepurposeofnationalprogrammesistiedtothepromotionofthenationaleconomy.Often,protectionisgrantedonlytonationalcompaniesandtheirprojectsincountriesfriendlytotheinvestorshomecountry.Coveredrisksareusuallyexpropriation,non-convertibilityofcurrency,andpoliticalviolence.OPIC,forinstance,coversmattersofexpropriation,non-convertibility,andlossesduetowar,revolution,insurrection,andcivilstrife.Someofthenationalprogrammesaresubsidized,suchastheGermanone,whileotherssuchasOPICintheUnitedStatespurporttoactwithoutaburdentothetaxpayer.ThecreationoftheMIGAwasprompted,accordingtoitsPreamble,bytherecognitionthattheflowofforeigninvestmenttodevelopingcountrieswouldbefacilitatedandfurtherencouragedbyalleviatingconcernsrelatedtonon-commercialrisks.Privatecompaniesenteredtheinvestmentinsurancemarketontheassumptionofhigherefficiencyandanacceptablemarginofprofit.Initsoriginalcontextanddesign,theprivateprogrammesemergedasextensionsoftraditionalformsofmarineinsurance.Privateinsurersseektodiversifytheirownriskbyschemesofmutualcooperationwithothercompaniesandalsobyleveragingtheiroperationsbyrelianceonreinsurers.Theyhavetheadvantage,vis--visthepublicsector,ofbeingableto(p.229)tailortheirproductstotheneedsoftheindividualcompanyinsured.Theycanpriceandacceptorrejectriskbasedoncommercialconsiderationsandareabletoactspeedilyandflexibly.Accordingtoanagreementamongprivateinsurers(WaterborneAgreement),theyexcludenuclearrisks,butwillotherwiseunderwritewarriskonacontrolledbasisaspartofapoliticalriskaccountandnowroutinelyinsureagainstterrorism,althoughthisriskisoftensupportedbygovernment-backedreinsurance.Privateinsurersdonotinpracticecovertheriskofcurrencydevaluationordepreciation.Thestrongestdifferencebetweenprivateandpublicinsurersconcernsthetimehorizonoftheinsuranceoffered:whereasthepublicsectorhasbeenpreparedtooffercoverageforupto20years,privatecompaniestypicallylimittheirriskbyofferingprotectionformuchshorterperiods.Whilesomeprivatemarketpoliticalriskinsurersoffercoverageforupto15years,otherslimitthemselvestomuchshorterperiods,sometimesonlyforthreeyears,subjecttorenewal.Theexistence,sidebyside,oftheseactorspresentsauniquepanoramaofcompetitiveandcomplementaryservicesbytheprivatesector,nationalgovernmentalagencies,andinternationalactors.Expectationsheldpreviouslythattheactivitiesoftheprivatesectormightobviateorcrowdouttheneedfortheserviceofpublicinstitutionsturnedouttobeunrealistic,atleastoverthepastdecades.Somegovernmentagencies,notablyOPIC,seektocooperatewiththeprivatesectorandnotjusttocompetewithit.Theresultisoftencoinsuranceandreinsurance.Tosomeextent,governmentalinsuranceprogrammesreflectforeignpolicygoalsofthegovernmentespeciallyasregardseligibilityofprojects.Also,majortypesofinvestmentriskshaveremainedsodifficulttoassessinmathematicaltermsorsoriskpronethatprivateinsurershavedecidednottocoverthem.Thus,nationalinsuranceagenciesworkinahybridmanner,reflectingprinciplesofprudentprivateriskmanagementbutalsogovernmentalcharacteristics.

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From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber:Chinese University of Hong Kong; date: 06 January 2016

Asforcompetitionbetweendomesticinsurers,privateandpublic,andMIGA,theydifferintheirwillingnesstoacceptvarioustypesofriskandofferdifferentratesfordifferentpackagesofinsurance.Altogether,overlappingelementsexistamongthepoliciesandactivitiesofthedifferentinsurers,andthedivergencesareexplainedbythedifferentgoalsandinstitutionalsettings.Thevariousexistingregimesdivergeinpartinregardtothetypesofinvestmentcovered.ExportsarecoveredbyMIGAiftheycontributesignificantlytoaspecificinvestment. Activitiesofthehoststatewhenactingasapurchaser,supplier,manager,andcreditorareexcludedfromcoveragebyOPIC. MIGAisonlypreparedtoinsureaninvestmentthatsatisfiesitsunderstandingofeconomicsoundnessandhasreceivedhostcountryapproval. TherulesofMIGAdonot,however,requirespecificstandardsofprotectionofforeigninvestmentinthehostcountry.ThisisbecauseMIGAonlyinsures(p.230)riskinMIGAmembercountrieswherethereisabilateralagreementbetweenMIGAandthehostgovernment.Ithasbeenthegeneralpracticeofgovernmentinsurerstoconcludeagreementswithhostcountriesthatprovideforsubrogation.Thismeansthattheinvestorsrightsagainstthehostcountryareassignedtotheinsureruponpaymentundertheinsurancecontract.Somecountries,suchasGermany,includeclausestothiseffectinbilateralinvestmenttreaties(BITs),whereasothers,suchastheUnitedStates,concludespecificagreementsforthispurpose.InGermany,governmentalinsurancewillonlybegrantedforinvestmentsincountriesthathaveconcludedaBITwithGermanyorinwhichasimilardegreeoflegalsecurityexists.Withregardtothetypesofriskcovered,thesearesimilartothoseaddressedinBITs.Beyondtheprotectionofassets,mostprogrammesofferprotectionagainstnon-compliancewithcontracts.Also,therisksofcurrencyinconvertibilityandrestrictionsoncurrencytransferarecovered.Ofcourse,allschemesprovideforprotectionagainstdirectandindirectexpropriation,andsomegovernmentinsurers,forexampleOPIC,andmostprivateinsurersalsocovercasesofbusinessinterruption.Remarkably,theMIGAConventioninChapterIII,Article11(a)(ii)specificallyprovidesthatnolossiscoveredarisingfromnon-discriminatorymeasuresofgeneralapplicationwhichgovernmentsnormallytakeforthepurposeofregulatingeconomicactivityintheirterritories.Risksofwarandcivildisturbancearegenerallycovered.OPIC(andmostothergovernmentinsurersandthelargerprivatesectorunderwriters)willnotcoverprojectsthatviolateinternationalenvironmentalstandards,createunreasonablehealthrisks,orfailtorespecthumanrights,inparticularworkersrights.Concerningprotectionofnon-compliancewithcontracts,repudiationorbreachiscoveredbyMIGAiftheholderoftheguaranteedoesnothaveaccesstoajudicialandarbitralforumorthedecisionofsuchaforumisnotrenderedwithinareasonableperiodasdefinedbyMIGA,orsuchadecisionisnotenforced. Non-paymentofanobligationunderanarbitralawardmayconstituteanexpropriationasunderstoodininternationallawandascoveredbyaninsurancecontract,evenifthehostcountryconsidersthatitisnotabletopaytheamountdueunderthearbitralaward.Disputeshavearisenbetweeninsuredinvestorsandtheinsurerwhenthetwosideshavedisagreedontheinterpretationorapplicationoftheinsurancecontract.Typically,suchdisputesareresolvedthrougharbitrationprovidedforintheinsurancecontracts.Often,theresultingdecisionsdealwithlegalissuesthatappear(p.231)similartothosethatariseintherelationshipbetweenthehoststateandtheinvestorinthecontextofaBIT.Forinstance,theinvestormayclaimthatitstreatmentbythehoststateamountstoanindirectexpropriationascoveredbyaninsurancecontract.Inanumberofdisputes,tribunalssetupunderinsurancecontractshaveaddressedlegalissuesofexpropriation,currencyinconvertibility,breachesofcontract,theconsequencesofpoliticalviolence,andattribution.Somedecisionsofthesetribunalssetupunderinsurancecontractshavebeenrelieduponindisputesbetweeninvestorsandstates. Theauthorityofarbitralawardsrenderedunderinsurancecontractstodisputesbetweenstatesandforeigninvestorswilldepend,notleast,onwhethertheprovisionsininsurancecontractsandthestandardsofprotectionintreatiesandcustomaryinternationallawarethesame.

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From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber:Chinese University of Hong Kong; date: 06 January 2016

Footnotes:Accordingtoareportpublishedin2009,only14percentofthetotalglobalflowofforeigndirectinvestmentiscoveredbyinsurance,seeMIGAReport,WorldInvestmentandPoliticalRisk(2009)34.SeeIShihata,RegionalInvestmentInsuranceProject(1972)6JWorldTradeLaw185.SeeUSC2194.CommentaryontheConventionEstablishingtheMultilateralInvestmentGuaranteeAgency(1986)1ICSIDReview-FILJ193,201.SeeArt4.03(b)oftheOPICContractofInsuranceAgainstInconvertibility,Expropriation,PoliticalViolence(Form234KGT1285,2ndrev),reprintedinRDBishop,JCrawford,andWMReisman,ForeignInvestmentDisputes(2005)517,519.SeeConventionEstablishingtheMultilateralInvestmentGuaranteeAgency,Arts12(d)and15.SeegenerallyMPerry,AModelforEfficientAid:TheCaseforPoliticalRiskInsuranceActivitiesoftheOverseasPrivateInvestmentCorporation(1996)36VirginiaJIntlL511 ;seeUSC22,2199etseq.SeeMIGAConvention,ChIII,Art11(a)(ii).SeeegMidAmericanEnergyHoldingsCompanyvOPIC,citingtheRestatement(Third)ofForeignRelationsLaw(1999),712,cmthandtheHarvardDraftConventionontheInternationalResponsibilityofStatesforInjuriestoAliens;anexcerptofthecaseisreprintedinDBishop,JCrawford,andMReisman,ForeignInvestmentDisputes(2005)563 etseq.Butseealsothepositionthatnon-paymentofdebtswillnotamounttoanexpropriation(WasteManagement),p129.TheAwardinRevereCoppervOPIC,Award,24August1978,56ILR(1980)258,isoftencitedin

thecontextofdefininganindirectexpropriation.

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