payee is a beneficiary of an insurance policy, but does not have an insurable interest in its own
right. In other cases all lenders are insured for their own interests and insurance proceeds are
paid either directly to each lender or through a designated loss payee.
As they began to source political risk insurance for the CBK project, the coordinating
lead arrangers had four principal concerns:
- market capacity for the required tenor – it appeared that this transaction would have to
tap the entire market capacity for Philippine political risk insurance; - acceptance of private political risk insurance by the bank syndication market;
- structuring the policy to accommodate multiple insurers and lenders; and
- complete and understandable policy coverage without unnecessary or uncontrollable
exclusions.
Specific policy issues included:
- terms of cover – finalising the essential terms laid out in the political risk insurance policy;
- nonvitiation – ensuring that acts of any one insured party, in this case one of the banks,
do not lead to disruption of cover for all insured parties; - exclusions – providing for events that the insurer expressly declines to cover; and
- the willingness of private insurers to cover the impact on principal and interest payments,
on a present-value basis, of a loan acceleration stemming from an insured event.
SG, working with Milbank Tweed, represented the coordinating lead arrangers for political
risk insurance matters. Given the complexity, the required speed of execution and the num-
ber of ‘firsts’ that they would be attempting with this transaction, they appointed JLT Risk
Solutions to assist in the structuring and placement of the insurance. To ensure the accep-
tance of the package by the syndicated bank loan market, JLT set out to develop a single pol-
icy exposing the lenders to the risk of the smallest possible number of insurers. Three
insurers, AIG, Zurich Insurance Company, and ACE Global Markets at Lloyds of London,
acted as counterparts to the lenders under the policy, while Sovereign and XL Brockbank
acted as leaders for the placement of reinsurance. In all, 13 insurance underwriters partici-
pated in the policy.
Ultimately the insurers did not agree unconditionally to cover the present-value impact
of a loan acceleration covered by an insurable event. However, the nominal value of the prin-
cipal and interest payments was covered, and the insurers at least retained the right to make
the lenders completely whole on a present-value basis as well.
Lessons learned
Gore and Hawkes attributed the success of the CBK syndication to the strong underlying
rationale for the project, a natural mitigant to many forms of risk; the complementary expe-
rience that Impsa and Edison Mission Energy brought to the project; and the strength and
comprehensiveness of the political risk insurance package. They believe that this project is a
milestone that has demonstrated how private political risk insurance can serve as a very real
alternative to more traditional cover from ECAs and other agencies. Private political risk
insurance tends to be more expensive, but it also tends to be more flexible, and it can be
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