In theory, there ought to be a vibrant insurance market for companies seeking to operate in Iraq. Lucrative energy exploration and reconstruction work, particularly in the power sector, needs to be done at a time when security conditions are still uncertain. Premiums have come down since 2007 and the Export-Import Bank, which insures medium-term loans to support US exports, has just opened in Iraq following a re-evaluation of its risk ranking.

“Iraq is a high-growth market at a time when little growth is happening elsewhere,” says Ali Al Saffar, Iraq analyst for research and advisory company Economist Intelligence Unit. “Once contracts are signed, I imagine premiums will steadily grow lower – Iraqi bond yields have been coming down.”

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In practice, however, the complexity of the risks involved means that most (but not all) corporate insurance underwriting, for political violence exposures at least, is being done by the Lloyd’s market. There the mood, for the moment, remains cautious.

The supply of coverage for personnel, property and cargo has certainly become more sophisticated and flexible as brokers entering the Iraqi market have come to understand the situation better.

“When we first started arranging cover for operators of an armed convoy in Iraq it was a very high premium”, says Andrew Pickthorn, principal of Integro Insurance. “Now more people can quantify the risk. It takes a while for the risk perception to meet the reality.”

William Wakeham, managing director of AAIB, a Jordan-based broker firm with offices in Baghdad, Basra and Erbil, says that personal accident premiums have come down from 12% to about 2% for one of his clients in central Iraq. But improvements in the security situation are still seen by the markets as too sporadic to offer more long-term insurance products – such as political risk – at an economic rate.

Airline insurance also remains very expensive, and according to Terry Rolfe, who sources such insurance for clients at insurance brokers Integro, it is unlikely to come down without several consecutive months of relative stability.

Coral Parfitt, global insurance consultant for London-based brokers Bellwood Prestbury, says she does not anticipate a downward trend in premiums in the Iraq market, while Samer Awwa, vice-president of business development for brokers Aon in New York, says: “Commercial markets need to see improvements.”

Sticking point

Political risk insurance (PRI) is available, says Mr Awwa, but it is difficult and expensive to obtain. Many big multinationals simply insure themselves. But, according to Llewellyn Werner, chairman of C3, an investment consortium specialising in conflict and post-conflict markets, the lack of economic PRI on the commercial markets is a major obstacle to investment in Iraq, even for companies with the balance sheet to insure themselves, as they prefer to have more than one layer of insurance.

C3 is currently trying to put together a PRI package for its clients, together with Aon and an Iraqi partner organisation, but it is being held up by political stalemate following the March elections. “The greatest impediment to affordable PRI is the failure to form a government,” says Mr Werner.”

Market caution is “both a real and a perception problem”, says Rod Morris, vice-president in charge of PRI at the Overseas Private Investment Corporation (OPIC), a self-sustaining US government agency that provides credit insurance in emerging markets. OPIC has not revised its Iraq rankings since 2003. Because part of its mandate is to support US foreign policy, however, it is more willing to take on risk than the commercial markets, though its preference for comprehensive coverage sometimes makes it more expensive.

According to Mr Werner, such interventions are no substitute for private sector involvement. “Having a quasi-governmental organisation provide this insurance is not expeditious,” he says. “It must come from the private sector.”

Although the basic suite of insurance products on offer – war and terrorism, cargo, kidnap and ransom, personal accident, Defense Base Act insurance (mandatory for personnel contracted by the US government), oil, airline, medical evacuation, political risk and liability – has not changed much since the start of the Iraq war in 2003, brokers have come up with various ways to improve service and rates. AKE, for example, has intelligence reports sourced from the ground in Iraq, which, according to Fraser Newton, AKE’s director of insurance, enables the firm to negotiate a better rate for clients with underwriters. Another way AKE tries to keep costs down is by ‘packaging’ clients together when approaching the underwriters. Government-funded work in Iraq is increasingly sub-contracted, which makes it harder for the individual subcontractors to get the kind of bulk discount available to large government orders.

An obvious gap in the supply chain is the lack of brokerage firms with a presence on the ground in Iraq. This presence is important not just to assess risk but also to service the client and ensure the smooth running of the subcontracted services in the event of a claim. When more companies are taking out credit risk insurance, it will also be important to have loss-adjusters and surveyors on the ground, too, says Andrew Pickthorn, calling this “a market that’s developing”.

Gap in the market

“What you need is someone who understands local environment, but who also understands the international insurance markets,” says Jonathan Biles, a partner at broker firm Culver. Culver often partners with larger brokerage firms to provide on-the-ground client servicing, ‘short-circuiting’ the chain of subcontractors needed to get the level of service clients require. “Someone actually needs to deliver the service, product or project on the ground,” says Mr Biles. “It’s something the Iraqis (and the Americans) have failed to grasp and has cost billions of dollars as the spiral of subcontractor to subcontractor leaches the original investment announced at government level. This is the gap in the market I have focused on.”

Another firm that stresses the importance of being on the ground is AAIB, which has three offices in Iraq and started its own medical evacuation company, AlfaEvac, in 2006.

Both AAIB and Culver seek to add value by facilitating partnerships with local Iraqi insurance companies. For companies lookingat a long-term presence in Iraq (and the banks that finance them), Iraqi participation in the risk provides extra reassurance, and some companies have a corporate ethos obligating them to work with local partners wherever possible.

Current legislation obliges companies to place the risk in the local market if capital and service are available to the same degree as outside, but this is widely expected to tighten after a new government is formed. “In Kuwait you have to place business through a local insurance company,” says Michael Ellery, director of Anderson Lloyd International, a London-based broker offering insurance coverage in Iraq, “I’m sure it will change in the future so that we as brokers have some kind of Iraqi company to front it through.”

According to AAIB’s Mr Wakeham, foreign companies are already using AAIB to ensure compliance with local conditions because they believe the current legislation to be ambiguous. AAIB has been working to build the capacity of local insurance providers, which is currently very limited. The market is dominated by the three state-affiliated institutions, and thinly capitalised. “It won’t happen overnight,” says Mr Wakeham.

Growth area

Although these market gaps and growth areas ought to be attracting more brokers to Baghdad, the operating costs are high, and the expertise needed to operate on the ground is not easily accrued. It took AAIB almost two years just to get registered. Moreover, as Mr Wakeham points out: “There are not many practitioners that would want to be in Iraq.”

Mr Biles estimates it will be another three to five years before big international brokers start setting up a permanent presence in Baghdad.

Another growth area, at least according to one broker, is liability insurance. “There is a bit more regulation in Iraq,” explains Anderson Lloyd’s Mr Ellery, “and we’re seeing a big upturn in the liability side of the business.”

For now, however, development of the market has to wait until Iraq forms a government and the security situation stabilises further. As C3’s Mr Werner puts it: “Iraq is in limbo.” AKE’s Mr Newton adds: “Eventually I would expect other people to enter the market. The (Lloyd’s) syndicates can’t take on everything. But that’s a way off yet.”

According to OPIC’s Mr Morris, at a recent meeting of the Berne Union, the leading association for PRI export credit insurers worldwide, industry representatives discussed the fact that while there was a lot of interest in investing in the Kurdistan region, which is dramatically safer and perceive to be more business-friendly, there was not much appetite for the rest of Iraq at the moment. “There are a lot of people testing the water,” says Mr Morris, “but it is not flowing yet.”