What is Political Risk Insurance
Political risk insurance provides financial protection to investors, financial institutions and businesses that face the possibility of losing money because of political events. Political risk insurance protects against the possibility that a government will take some action that causes the insured to experience a large financial loss. Political risk insurance can cover many possibilities, such as expropriation (e.g., government confiscation of property), political violence (e.g., acts of civil unrest or insurrection), the inability to convert local currency and repatriate it, sovereign debt default and even acts of terrorism and war.
BREAKING DOWN Political Risk Insurance
While developing markets can present a great opportunity for business growth, they also present greater risks than developed markets. Political turbulence can cause assets to decline severely in value or be destroyed or confiscated and lose value altogether. Without political risk insurance, businesses would be especially reluctant to operate in developing countries with above average levels of political instability that threaten their assets and their ability to operate smoothly.
Types of companies that might purchase political risk insurance include multinational corporations, exporters, banks and infrastructure developers. Policies are customized to each client’s needs. They can cover one or multiple countries and can have lengthy terms and multimillion-dollar coverage amounts.
The ability to lock in an insurance policy for many years—up to 15 years, for example, with one major issuer—is a key feature of political risk insurance. Many business opportunities require years to carry out, and political conditions can change dramatically in a short time. If a business knows that it will be insured against political risks for years regardless of what happens, it can confidently proceed with activities that might otherwise be too risky to pursue.
Scenarios for Political Risk Insurance
Political risk insurance can protect physical assets, stock investments, purchase contracts and international loans. For example, if a multinational corporation had a contract to provide drones to a foreign government, and after the corporation had manufactured and shipped all the drones, the government became insolvent and was unable to pay the balance owed, political risk insurance could cover the loss.
Similarly, if a new government came into power and changed import regulations in a way that meant the drone shipment could no longer enter the country, political risk insurance could cover the drone company’s loss.
Another example could be an automobile manufacturer that set up a plant in a developing country and suffers a risk of losing its plant following a coup in the country. If after the coup, the national government declares its ownership of all formerly private factories, political risk insurance could compensate the auto manufacturer for the loss of its plant.