oversight

Overseas Private Investment Corporation's Management of the Investment Insurance Program

Published by the Government Accountability Office on 1977-07-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                               DOCUMENT RESUME
  02819 - [A2153243)

 Overseas Private Investment
                              Corporaticn's Management of
 Investment Insurance Program.                            the
                                Jujy 29, 1977. 6 pp.
 Testimony before the Senate
                             Committee on Foreign Relations:
 Foreign Assistance Subcommittee;
                                   by J. K. Fasick, Director,
 International Div.

 Issue Area: International
                                Economic and
                                         Military Programs (600).
 Contact: International Div.
 Budget Fnction: International
 Organizaticn Concerned: OverseasAffairs (150).
 Congressional Relevance: Senate Private Investmlent Corp.
                                  Committee on Foreign Relations:
     Foreign Assistance Subcommittee.

            The management of the II*estment
  the Overseas Private Investment                    Insurance Program by
  by GAO. In essences the OPIC has      Corporation    (OPIC) was reviewed
  directives tc increase private         nt   met  the   1974 legislative
  program and as made only limited    participation     in  the insurance
 concentration of coverage in certain     improvement in reducing
 business conc?.rns. OPlC's efforts          countries and in large
 companies have been disappointing.       to attract private
                                           The main reason forinsurance
                                                                   this
 failure, as reported by the compan/es
 limited knowledge of political                themselves, is their
                                     risk insurance. The congressional
 mandate to have the private insurance
 insurance role by 1980 will probably sector assume the direct
 mandate has placcd OPIC in the              not be met. Further, this
 red&:cing its premium income and    position    of substantially
                                       incurring large payments for
 reinsurance fees while only minimally
bulk of its portfolio. Any                    reducing the risks for the
                             alternative        daction regarding
privatization would require either
existing legislation. Only                repeal   or amendment of
                             limited, if any, improvement
made by OPIC in its efforts to                                      has been
countries and to increase the reduce concentration in certain
medium- and small-business range. monetary coverage of firms in the
efforts to encourage investment          It is also doubtful that
countries ill be successful.          in  the lesser developed
                                   (DJM)
                            UNITED STATES GENERAL
                                                  ACCOUNTING OFFICE
                                   WASHINGTON, D. C. 20548

                                                           FOR RELEASE ON DELIVERY
O~f
 _EXPECTED
--4                                                                 AT 10:00 a.m. EDT
                                                           Friday, July 29, 1977
0
                                        STATEMENT OF
                                      J. KENNETh FASICK
                                DIRECTOR, INTERNATIONAL DIVISION

                                           BEFORE
                             SUBCOMMITTEE ON FOREIGN ASSISTANCE

                                          OF THE
                              COMMITTEE ON FOREIGN RELATIONS
                                    UNITED STATES SENATE

                                            ON
                OPIC'S MANAGEMENT O THE INVESTMENT
                                                   INSURANCE PROGRAM,

         Mr. Chairman and Members of the
                                         Subcommittee:
              We appreciate the opportunity
                                             to appear before you to briefly
        highlight the contents of our recently
                                                  issued report on the Investment
        Insurance Program managed by the
                                          Overseas Private Investment Corporation
        (OPIC). The objective of our review
                                               and evaluation which resulted in
        this report was to determine how
                                          effective OPIC had been in imple-
       ,Tenting certain 1974 legislative
                                         directives and in correcting some
                                                                              of
       the weaknesses of .the program that
                                            were pointed out in hearings held
       by the former Subcommittee on Multinational
                                                      Corporations in 1973.
 More specifically, we evaluated (1) the progress made to increase
                                                                    the
 participation of private insurance companies in the political
                                                               risk
 insurance program, (2)the likelihood of the private insurance sector
 completely taking over the direct insurance role, (3)actions taken
 by OPIC to increase small and medium firm participation and to over-
 come the concentration of insurance in a Few countries, and (4) the
 degree to which the OPIL s programs encouraged companies to make
 investments in the lesser developed countries that Othcr-wise would
 not have been made.
 PROGRESS AND PROGNOSIS FOR PRIVATIZATION
 OF POLITICAL RISK COVERAGE
     We have concluded that only limited progress has been made to
increase private participation in OPIC insurance programs. The
participation to date is confined to coverages for expropriation
                                                                 and
inconvertibility risk. There has been no participation to date
                                                               by
private companies in war risk insurance.
     OPIC's efforts to attract private insurance companies have been dis-
appointing. For example, 206 companies were contacted in 1976 of
                                                                  which
only 105 responded and then only 6 of these decided to join the
                                                                15 com-
panies already participating.   During our review, we asked 20 private
insurance firms for their opinions of privatization--12 that declined
OPIC's invitation to participate, 5 that are now participating,
                                                                and
that dropped out after participating for only 1 year.   Some of these
companies are in the "Hartford Group"--companies located in Hartford,




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     Connecticut, that are considered
                                         to be the leaders of the insurance
     industry. One former participant
                                          declined to give us its opinion.
          The 12 insurers declined CPIC's
                                             invitation to join the Group
    generally for the same v'easons.
                                        'he main reason cited was their
    limited knowlpdge of political
                                     risk insurance; most of then;
                                                                    believe
   that conventional insurance
                                 principles cannot be applied
                                                                 to expropria-
   tion and inconvertibility losses
                                       because of the political factors
   involved. The capacity to undertake
                                            additional markets, especially
  in unfamiliar areas, has also
                                   prohibited. or at least delayed
  participation in the Group.
                                  Recent underwriting losses
                                                               and declining
  stock narket values, in which
                                   private insurers have sizable
                                                                   invest-
 ments, have contributed to
                               the reduction of surpluses which
                                                                   govern
 the amount c insurance that
                                 may be written. Thus, at this
                                                                   time,
 most of the insurers prefer
                                to limit their activities to
                                                               conventional
 domestic coverages.
        In view of conditions such as
                                       these, we concluded that it
                                                                     is
  highly unlikely that the congressional
                                           mandate to have the private
  insurance sector completely
                               take over the direct insura;nce
  1980 will be met. Further,                                    role by
                               it is evident that this mandate
                                                                 has placed
 OPIC in the position of substantially
                                          reducing   ts pemium income and
 its incurring large payments
                                for reinsurance fees while at
                                                               the same
 time only minimally reducing
                               the risks for the bulk of its
                                                               prtfolicX
      In view of the limited results
                                       to date, the future nf OPIC's
political ri k insurance program
                                    involves considering four alternatives--




                                   - 3-
first, continue to try for complete privatization but provide deadlines
more realistic than 1980; second, modify the private participation
provisions by recognizing the unlikelihood of ever being able to
achieve 100 percent privatization; third, abandon private participation;
and fourth, dissolve OPIC.    Each of these actions would require either
the repeal or amendment of existing legislation.    Further, the dissolu-
tion alternative would require that existing contracts be assigned to
another agency for liquidation.
COUNTRY CONCENTRATION AND SIZE OF
INDISTRIES CCVERED
     OPIC has only mide limited, if any, improvement in its efforts to
reduce its concentration of coverage in certain countries and to
increase the monetary coverage of firms in the medium and small business
range.
     We reported in 1973 that OPIC's predecessor, the Agency for
International Development, had permitted its insurance coverage to
concentrate in a relatively few countries.   OPIC assumed its predeces-
sor's insurance portfolio.    Even though concentration levels have been
reduced in some countries, OPIC's insurance portfolio continues to be
concentrated in a limited number of countries such as Brazil, Jamaica,
Korea, and the Philippines.   For example, the portfolio coverage in
Brazil for iconvertibility, expropriation, and war risk increased
from 7.9, 6.1, and 6.8 percent in 1972 to 21.9, 22.3, and l1.9 in




                                    - 4 -
  1976, respectively.   In Korea, such coverage incresned from 11.0,
 8.0, and 11.7 percent in 1972 to 11.6, 14.9, and 13.9, respectively
 in 1976. This is due, in part, to the long-term nature of
                                                            existing
 contracts. More importantly, even though OPIC's policy is
                                                            to limit
 concentration in any one country, it continues to insure investments
 in countries of high insurance concentrations. The tendency
                                                              to do so
 is influenced by factors such as the limited investment opportunities
 in many of the lesser developed countries and the corresponding
                                                                 desire
 by investors to saet projects in more industrialized countries,
                                                                  such
 as Brazil.
      Further, lue partially to the existing demand, OPIC continues
                                                                    to
 provide the majority of its insurance to the larger "Fortune
                                                              500"
corporations, which comprise the majority of those seeking
                                                           OPIC
insurance. Since December 1973, about 83 percent of OPIC's
                                                            insurance
coverage has gone to these firms. Three companies received
                                                            29 percent,
 9 percent, and 29 percent of the total insurance issued
                                                         in 1974, 1975,
and 1976, respectively.
     The success of OPIC's efforts to encourage investment in
                                                              the lesser
developed countries is minimal principally because opportunities
                                                                 for
viable or profitable projects are limited in such countries.
                                                              Also,
since the program promotes, as well, investment opportunities
                                                               in more
developed countries, any future success appears to depend
                                                          on the
willingness of potential investors to select the less desirable
                                                                 alter-
natives.   !t is doubtful that this will occur in most instances.




                                  -5-
     While progress has been less than that desirable, OPIC has
attenpted to reduce its concentration in certain countries. It has
also attempted to encourage more small and medium firms to become
involved in investment programs in the less developed countries.
    Mr. Chairman, this concludes my statement.   We shall be pleased
to answer any questions that you or other members of the Subcommittee
nay have.




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