A study of political risk selection and pricing among private insurance providers: a mixed methods approach

This study demonstrates that the basis of decision-making and risk-pricing in the UK Political Risk Insurance (PRI) market is a combination of Art and Science, with factors such as trust and reputation playing an important role. The study breaks new ground by conceptualising and examining different methods and strategies of political risk underwriting employed in the UK private insurance market which do not rely on statistical tools as seen in more traditional insurance types. The PRI sector has been largely overlooked by regulators and academics alike, despite the fact that the market helps to promote foreign trade and contribute to the economic development of emerging markets (see e.g., Gordon, 2008; Jensen, 2008; Hollywood, 1992). Moreover, it is a profitable industry that generates around US$1 billion in premiums annually (MIGA, 2010). PRI is a challenging research field for a number of reasons. Firstly, it is a highly specialised niche market with the total of 82 public and private PRI providers worldwide, of which 49 are the members of Berne Union (Berne Union, 2010). The market can be further sub-divided into three even smaller distinct markets such as multinational providers (e.g., MIGA), national providers (e.g., OPIC, ECGD or ONDD) and private PRI providers (e.g., Chubb, ACE, or Zurich). Secondly, it is a relatively new line of business, the origins of which can be traced back to the Marshall Plan in 1948, with the private PRI market being formed in early 1970s (DeLeonardo, 2005). Finally, the sector suffers from lack of transparency with very little data publicly available (Spagnoletti and O’Callaghan, 2011). This study overcomes obstacles of shortage of data by adopting an innovative research design which has enabled the generation of primary qualitative and quantitative data. It is a semi-experimental study that combines grounded theory analysis (Glaser and Strauss, 1967) and scenario-based survey approaches. The semi-experimental study approach was chosen as it allowed to control for more context-specific variables that could impact on an underwriter’s risk perception and risk acceptance. A total of 104 participants successfully completed the survey. It is the first study to apply this approach to the field of PRI underwriting.