1. SARIMS Discussion Credit and Political Risk Implications for Risk Managers November 2009 Daniel Galvao, Sr. Vice President, Marsh Canada Limited

2. 1 Agenda  A bit of basics  Why is important for Risk Managers?  2008/09 Credit crisis  Selected tough jurisdictions  Key take aways

3. 2 Credit and Political Risk definitions  Political Risk = loss or damage to assets arising from actions by or against foreign governments. Inactions of host government also. – Insurable: Foreign Direct Investments (FDI) Contracts with foreign governments Political perils affecting trade  Credit Risk = risk of default arising from multiple counterparties (buyers, suppliers, lenders, insurers, etc.) – Insurable: buyer/client credit non-payment risk supplier default risk – Protection available for financial counterparts in the CDS market

4. 3 Credit and Political Risk Insurance  Political Risk coverages: – Confiscation, Expropriation, Nationalization, Deprivation (CEND) type perils – Political Violence perils (Terrorism, War, SRCC, etc.) – Currency Inconvertibility & Transfer – Breach of Contract  Credit Risk coverages: – buyer/client non-payment: bankruptcy and default – supplier default

5. 4 Credit and Political Risk Insurance intermingling  Political Risk Insurance  Credit Risk Insurance Contract with foreign governments (non-payment) Political Perils affecting Trade (non-payment) Expropriation War/ Civil War Currency Inconvertibility Buyer Default Supplier Default Arbitration Award Default

6. 5 Credit and Political Risk Insurance market in Canada InsurerMultiline or MonolineType of Coverage ACEMultiNon-cancellable AtradiusMonoCancellable and non-cancellable ChartisMultiNon-cancellable ChubbMultiNon-cancellable COFACEMonoCancellable EDCMonoCancellable EulerMonoCancellable GCNAMultiCancellable Lloyd’sMultiNon-cancellable ZurichMultiNon-cancellable

7. 6 Why is it important for Risk Managers?  Increasingly weaved into “traditional” areas of risk management: Business Interruption, Physical Damage  ERM requesting involvement with other areas of organization (treasury, credit department) and linkage to stakeholders disclosure (Corporate Governance)  Globalization is here to stay: Canada is increasingly trading and investing more outside North America  Some insurance providers are known multiline insurers (leverage)  Application within captives making “need to know” lines of risk

8. 7 Credit and Political Risks and ERM CREDIT DEFAULT MARKET RISK INTEREST RATE CURRENCY / FX LIQUIDITY /CASH FLOW COMPETITION MARKETING RISK REPUTATION INTELLECTUAL CAPITAL INDUSTRY CHANGES PROPERTY DAMAGE NATURAL DISASTERS LIABILITY/LEGAL COSTS BUSINESS INTERRUPTION HEALTH AND SAFETY INFORMATION SYSTEMS SUPPLY CHAIN HUMAN RESOURCE/ ACCOUNTING CONTROLS STRATEGICSTRATEGIC FINANCIALFINANCIAL HAZARDOUSHAZARDOUS OPERATIONALOPERATIONAL

9. 8 2008/09 Credit Crisis: Putting It Into Perspective  2001/02 (last down cycle) largest default: WorldCom $103 billion  2008/09 largest default: Lehman Bros. $691 billion; Washington Mutual $328 billion  1930/33 (longest recession): Default rates at 16 percent throughout  2008/09: Default rates reaching 13 percent in Q4 ’09 and coming down  2001/02: Brief, with rapid accelerated growth (V-shaped recovery)  2008/09: Looking like a U-shaped recovery (Q3/Q4 2010), however mid-tier/small bank liquidity and US consumption not yet in shape; therefore a W or even “double dip” is possible

10. 9  Tightening credit conditions, reduction in premium inflow given lower level of sales in general (= HARD MARKET!)  Premium rates up by 10 to 35 percent depending on the insured loss ratio, industry and buyer risk portfolio (= HARD MARKET!)  Expected improvement in 2010 (Q3 onwards) however still risk of low/no recovery (= MAYBE END OF HARD MARKET…)  Widening service offering among certain insurers: credit information services, collections services What are credit insurers saying?

11. 10 Selective tough jurisdictions (Energy focus)  Top 10 riskier countries: 1) Venezuela 2) Ecuador 3) Nigeria 4) Iran 5) Pakistan 6) Kazakhstan 7) Vietnam 8) Ukraine 9) Russia 10) Indonesia And others not so great… Argentina, Dominican Republic, Honduras, Sudan, Zimbabwe

12. 11  Risk Managers are increasingly being asked to weight in the impacts of globalization risks in a company’s results  Credit and Political Risks are not rare occurrences: 2008/09 credit crisis is just the latest example  Assess the risk, quantify/prioritize it, consider retention/transfer, document process for internal purposes and external (governance) In Summary…

13. 12 THE END… Questions? Thank You Daniel Galvao (416) 868.7988 Daniel.Galvao@marsh.com

14. 13 DISCLAIMER The information contained herein is based on sources we believe reliable, but we did not verify nor do we guarantee its accuracy. It should be understood to be general risk management and insurance information only. Marsh makes no representations or warranties, expressed or implied, concerning the financial condition, solvency, or application of policy wordings of insurers or reinsurers nor does Marsh make any representations or warranty that coverages may be placed on terms acceptable to you. The information contained in this presentation provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation, and should not be relied upon as such. Statements concerning tax and/or legal matters should be understood to be general observations based solely on our experience as risk consultants and insurance brokers and should not be relied upon as tax and/or legal advice, which we are not authorized to provide. Insureds should consult their own qualified insurance, tax and/or legal advisors regarding specific risk management and insurance coverage issues. Marsh assumes no responsibility for any loss or damage sustained in reliance of this presentation. Marsh is part of the family of MMC companies, including Guy Carpenter, Mercer, the Oliver Wyman Group (including Lippincott and NERA Economic Consulting), and Kroll. The materials, data and/or methodologies used in this presentation are proprietary to Marsh. This document or any portion of the information it contains may not be copied or reproduced in any form without the permission of Marsh Canada Limited, except that clients of any of the companies of MMC need not obtain such permission when using this report for their internal purposes, so long as this page is included with all such copies or reproductions. Copyright 2009 Marsh Canada Limited. All rights reserved.