Political Risk Insurance

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.

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.
Political Risk Insurance
Issue:  Political risk insurance (PRI) is defined as a tool for businesses to mitigate and
manage risks arising from the adverse actions—or inactions—of governments. As a risk
mitigation tool, PRI helps provide a more stable environment for investments into developing
countries, and to unlock better access to finance. Political risk may be defined as economic
changes arising from events either directly or tangentially related to the political process.
Some examples of events covered  by political risk insurance include government
expropriation, war, insurrection, terrorism, sovereign payment default, breach of contract, and
specific government action (new laws and/or regulations) that can directly affect a company's
operations and interfere with its ability to perform critical functions. Unlike commercial
insurance, PRI is aimed to protect businesses and business ventures against perils that other
conventional insurance policies would not normally cover. Due to the unpredictability of
many political events, PRI offers businesses an ability to cushion the impact and increase
long-term durability, especially when operating in emerging economies.  
Overview: Political risk insurance has a long history mainly as a government tool for
reducing risks associated with foreign trade and direct investment. Recently, PRI has become
a critical component of an increasing number of emerging capital markets transactions
involving both public and private insurance companies. A survey of 41 major corporations
by broker Willis Towers Watson found that 61% believe political risk levels increased in
2019 while 68% have suffered a political risk loss. Moreover, the same survey found 32% of
companies with revenues exceeding $1 billion reported experience of a catastrophic (more
than $250 million) political risk loss. 

Modern political risk insurance started taking shape after World War II to promote
investment under the Marshall plan. For over forty years, PRI was dominated by bilateral
institutions, such as the US Overseas Private Investment Corporation (OPIC), owned and
operated by national governments for the benefit of their national private capital. Numerous
multilateral institutions, such as the World Bank's Multilateral Investment Guarantee agency
(MIGA), also participated in the PRI market in the late 1980s. Multilaterals function as
financing conduits for regional and sector-specific economic development in their member
countries. Their mitigation of political risk comes mainly in the form of guarantees, either
partial risk or credit. 

While PRI is not exactly new, it has not yet developed into a fully mature market. Private
insurers first appeared in the early 1970s and became more active after the debt crisis. The
private political risk insurance market experienced a dramatic growth in the 1990s with
international investors enjoying a greater abundance of choices in the investment insurance
market.  Today, private political risk insurers are concentrated primarily in the UK, USA, and
Bermuda.  The largest private insurers are Zurich American Insurance, Lloyd’s, AIG, Chubb,
and Sovereign. According to Marsh, there are currently approximately 60 insurers operating
globally that offer PRI. Having a plethora of active insurers in the PRI market creates
significant competition, which gives buyers the ability to choose individualized coverage at a
less exorbitant price. Capacity in the market, according to insurance broker BPL Global, has
increased considerably over recent years.  Market capacity has jumped to over $1.5 billion
per risk, providing both depth in monetary amounts and increasing breadth in terms of the
number of different participating insurers. Over the past three years, overall PRI capacity has
increased across all product lines – with maximum lines for non-payment private obligor
risks and public obligor risks rising by 30% to $2.4 billion and $3 billion, respectively. 
Insuring an investment against political risk requires a proper and precise specification of
those political events that are to be covered under an insurance policy. Once a political event
occurs, coverage and the exact amount of insurance recovery should not and cannot be in
dispute. To receive payment for loss, the event in question must have been triggered by
political action, although the exact meaning of “political action” is often equivocal. 

Political risk insurers offer a wide variety of products that can be specifically tailored to any
investor's needs and can cover the entire range of politically induced risks. Political risk
insurance can be obtained through both private and public providers. Private providers
typically offer coverage related to developing and developed countries, and the coinciding
risk-events that can occur while conducting business in these places. Most public providers
are national export credit agencies (ECAs), which often act as intermediaries between
governments and exporters. ECAs may cover both export credit/trade transactions, as well as
longer-term investments.  

Depending on the risk, coverage can be long- or short-term. Trade risk coverage might last
for only 30 days, but for a major infrastructure development it could last for several years.
Although it should be noted that very few insurers will provide PRI coverage for longer than
a 10-year period. 

In January 2021, Allianz SE, a financial services company based in Munich, Germany,
discussed political risk and its current relevance.  Allianz had this to say: ”Political risks and
violence returns to the top 10 of the Allianz Risk Barometer for the first time since 2018,
reflecting the fact that civil unrest incidents such as protests and riots now challenge terrorism
as the main political risk exposure for companies. The number, scale and duration of many
recent events has been exceptional, such as the “yellow vest” protests in France (insured
losses around $90mn), as well as unrest in locations like Hong Kong ($77mn), Chile (about
$2bn) and Ecuador ($821mn).”  The emergence of political hostility and violence is
also increasing in the United States.  This is exacerbated by issues such as the COVID-19
pandemic, the rise of social justice movements such as Black Lives Matter, and other unrest
concerning the 2020 United States presidential election. The propensity toward this
heightened political unrest pushed the United States’s ranking on the Verisk Maplecroft
Civil Unrest Index down from the 91st riskiest jurisdiction to the 34th. 
Status: In the filings of insurer investments in foreign infrastructure projects with
the Securities Valuation Office (SVO) of the NAIC, the question of political risk insurance
is posited to assess the creditworthiness of the project in order to assign the appropriate NAIC
Designation. 

For questions or resolutions about issues regarding the sale and use of political risk insurance,
the NAIC Executive Office is the point of contact for all federal legislative, regulatory, and
international issues. The Executive Office works closely with key federal regulatory bodies to
ensure coordination on regulatory matters and to facilitate effective communication among
federal and state regulators. 

Political risk insurance

Political risk insurance is a type of insurance that can be taken out by businesses,
of any size, against political risk—the risk that revolution or other political conditions
will result in a loss.
Political risk insurance is available for several different types of political risk,
including:

 Political violence, such as revolution, insurrection, civil

unrest, terrorism or war;
 Governmental expropriation or confiscation of assets;
 Governmental frustration or repudiation of contracts;
 Wrongful calling of letters of credit or similar on-demand guarantees;
 Business Interruption; and
 Inconvertibility of foreign currency or the inability to repatriate funds.
As with any insurance, the precise scope of coverage is governed by the terms of
the insurance policy.
The underwriting of political risk insurance is a dynamic, growing business. As
globalisation increases, there are more corporations doing more business in more
places around the world with each passing year. Some of the changes occurring in
the business are high growth, new product offerings, and a greater role for private
capital.
While political risk insurance policies are sometimes manuscripted for specific
situations, the major political risk insurers have standard forms for the coverages that
they issue. For "complex" or larger investments manuscripted policies are the norm
and there may be several insurers providing cover in the form of a syndication,
through co-insurance, or perhaps with the participation of a reinsurer on a facultative
basis.
Providers of political risk insurance include public agencies and private insurance
companies.