The Island's only provider of primary political risk insurance ? Sovereign Risk Insurance Ltd.? keeps a relatively low profile, and is run with a minimum of staff.

But lest anyone think it is a small player, it has, in its seven-year history, become a leading writer of this specialised coverage in an environment that only includes a handful of other players.

Last year alone, Sovereign snapped up $2 billion in business.

Sovereign was set up as a joint venture of both ACE Limited and XL Capital in 1997.

What is political risk insurance? The birth of this type of coverage really dates back to the Marshall Plan in 1948, when the US government began a programme of issuing long-term political risk guaranties on the convertibility of funds, to encourage US investors to invest in post-war Europe.

Even today many nations provide domestic companies with export credit and political risk insurance. But a private market for this kind of coverage has also developed in the last 30 years.

Besides Sovereign, there are only a handful of other insurance firms playing in the private political risk market, with the world's largest commercial insurer, AIG, being one of them.

Now corporations doing business in or with a party in a foreign nation can insure against a variety of political risks. The three common ones are currency inconvertibility, expropriation and war and political violence. But political risk writers might also insure against non-payment and various forms of breach of contract, according to the Sovereign website.

Coverage terms can be up to 15 years and limits and the value of the policies generally is in the millions; Sovereign has a set limit of $125 million per project.

Although Mr. Barker Keith, Sovereign's lawyer, said there were political risks "in every country in the world," Sovereign only writes in emerging markets.

In 2003, Sovereign's business added up to more than $2 billion in policies written in emerging markets.

One of the biggest markets for this type of coverage is Latin America. Last week, Mr. Keith gave an overview of political risk in the region at the risk management congress for the Asociacion Lationamericana de Administradores de Reisgos y Seguros (ALARYS), which was held from September 7 through 10 at the Fairmont Southampton.

Mr. Keith told the group ? with the ALARYS congress having drawn about 200 delegates ? that foreign investors doing business in Latin America were susceptible to a number of political risk areas depending on where they were operating and the political and economic conditions of that country. He said that the landscape of political risk in Latin America was often characterised by an underperforming legal system that might be operating with an anti-foreign bias, and some cases of "decentralisation of power" where local authorities in a country might overthrow decisions made previously by a central government.

On top of that, Mr. Keith said that the region was also prone to both democratic and undemocratic transitions in governments.

"Frequent leadership changes increase the likelihood that agreements with governments will be renegotiated or terminated," he said.

He added that political unrest in certain countries ? and cited Colombia as the country where the problems were most significant ? was also a disruptive factor for businesses.

As an example, Mr. Keith, speaking generally, said in Colombia there had been quite a few political risk claims following damage inflicted by explosions set by the guerrilla forces.

To give some sense of the frequency of disputes with Latin American countries, compared to the rest of the world, the World Bank's International Centre for the Settlement of Investment Disputes (ICSID) ? where corporations and countries can voluntarily go to try and resolve differences ? currently lists 79 pending cases on their website. Of those, more than half ? 41 of the pending cases ? are disputes with Latin American countries, predominately Argentina with 32 disputes logged.

It would also appear to be a good market for Sovereign, with two of the three transactions made public by Sovereign in the last year being in Brazil.

The latest transaction, announced just last week, saw Sovereign issue two political risk insurance policies in connection with capital market transactions by one of the country's largest banks, Banco Itau.

The policies were said to be issued to cover a total of $350 million ? $250 million of which is denominated in Japanese yen over a ten-year period, and cover up to 18 months of interest payments on the notes in the case of currency inconvertibility and currency non-transfer.

Mr. Keith said the so-called litmus test for whether or not a corporation should buy political risk coverage is for it to ask whether there is any element in the business relationship it is about to go in to that could be susceptible to any action or inaction by the host government.

"If the answer is yes, chances are, they need political risk coverage."

@EDITRULE:

See Page 19 for start of coverage of Sovereign's claims history, which predominately came from claims tied to business transactions in economically troubled Argentina.