Political Risk Insurance: What it Means, Examples

Political Risk Insurance

Investopedia / Jessica Olah

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. It 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.

Key Takeaways

  • Political risk insurance provides coverage to investors, financial institutions, and businesses that face financial loss due to political events.
  • Political events covered under political risk insurance include expropriation, political violence, sovereign debt default, and acts of terrorism or war.
  • Political risk insurance brings comfort to companies doing business in developing countries.
  • Common companies that would purchase political risk insurance include multinational corporations, exporters, banks, and infrastructure developers.
  • Political risk insurance policies can be locked in for an extended period of time, reducing the risk of doing business abroad.

Understanding Political Risk Insurance

While emerging 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 to 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 longer 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.

Examples of Political Risk Insurance 

Political risk insurance can protect physical assets, stock investments, purchase contracts, and international loans. For example, Company ABC, a multinational corporation has a contract to provide drones to a foreign government. Company ABC manufactures and ships all the drones, but after the shipment, the government becomes insolvent and is unable to pay the balance owed. In this instance, Company ABC's political risk insurance would cover the loss.

Similarly, a new government comes into power and changes import regulations in a way that means that the drone shipment can no longer enter the country. Again, Company ABC's' political risk insurance would cover the loss.

Another example is Joe's Car Shop, 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 Joe's Car Shop for the loss of its plant.

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