What Is Political Risk Insurance?

admin / April 19, 2022

Political risk insurance protects investors, financial institutions, and enterprises against financial losses caused by political events. It protects against the potential that the government may take some action that causes the insured to suffer a significant financial loss.

Expropriation (e.g., government seizure of property), political violence (e.g., acts of civil disturbance or insurrection), the inability to convert and repatriate local currency, sovereign debt default, and even acts of terrorism and war can all be covered by political risk insurance.

Key Takeaways

• Political risk insurance protects investors, financial institutions, and enterprises from financial loss caused by political events.

• Political events covered by political risk insurance include expropriation, political violence, sovereign debt default, and acts of terrorism or war.

• Political risk insurance provides confidence to corporations conducting business in emerging countries.

• Common firms that obtain political risk insurance include multinational enterprises, exporters, banks, and infrastructure projects.

• Political risk insurance coverage can be locked in for an extended length of time, lowering the risk of conducting business overseas.

Understanding Political Risk Insurance

While developing economies can provide excellent opportunities for corporate expansion, they also pose more hazards than mature markets. Political unrest can cause assets to lose significant value, or to be destroyed or confiscated and lose all value. Without political risk insurance, firms would be especially hesitant to engage in emerging nations with above-average levels of political instability, which would jeopardise their assets and capacity to function efficiently.

Multinational enterprises, exporters, banks, and infrastructure developers are examples of companies that could obtain political risk insurance. Policies are tailored to each client’s specific requirements. They can cover one or more nations, and they can have longer durations and multimillion-dollar coverage amounts.

The capacity to lock in insurance coverage for many years—up to 15 years, for example, with one large issuer—is a crucial aspect of political risk insurance. Many economic prospects take years to develop, and political conditions can shift radically in a short period. If a company understands that it will be protected from political dangers for years to come, it may proceed with confidence with operations that might otherwise be too hazardous to pursue.

Examples Of Political Risk Insurance

Political risk insurance can safeguard physical assets, stock investments, purchase contracts, and overseas loans. For example, Company ABC, a global firm, has a contract to provide drones to a foreign government. Company ABC makes and sends all of the drones, but after the shipment, the government goes insolvent and is unable to pay the remainder owing. In this case, Company ABC’s political risk insurance would cover the loss.

Similarly, a new administration takes office and alters import restrictions in such a way that drone shipment is no longer permitted to enter the nation. Again, Company ABC’s political risk insurance would pay the loss.

Another example is Joe’s Car Shop, a car manufacturer that established a facility in a developing nation and now faces the possibility of losing the plant due to a coup in the country. If following the coup, the national government asserts control of all formerly private firms, political risk insurance might reimburse Joe’s Car Shop for the loss of its facility.