What Is Political Risk Insurance?
Definition & Examples of Political Risk Insurance
Political risk insurance protects businesses operating in emerging markets from losses caused by political violence or government acts.
Learn more about how political risk insurance works.
What Is Political Risk Insurance?
Many American companies grow by expanding their business into emerging markets. Emerging markets are countries with a low to middle per capita income. While these markets may offer economic advantages, they may also have certain risks.
Political risk refers to government decisions, social changes, economic policies, and other factors that can negatively impact a company's financial condition. Political risk can affect manufacturers, exporters, lenders, investors, and non-profit organizations. Such businesses can protect themselves against financial losses by purchasing political risk insurance.
A business may suffer a loss of income if forced to shut down all or part of its operations due to political violence or acts by a government.
How Political Risk Insurance Works
Political risk insurance (PRI) covers financial losses that result from several types of risks. It covers losses resulting from events that occur during the policy period, but it won't protect a business against events that have already taken place.
PRI policies are typically written to cover a specific project or activity, so the policy's duration depends on the length of the project. Policies may apply for a month or two or several years. There is no standard PRI policy form, so it's important to read the wording carefully. Policyholders should review all sections of the contract, including the conditions, definitions, and exclusions.
PRI is available from large, multiline insurers like Zurich, AXA XL, and AIG, specialty insurers like STARR, and Lloyds' of London, which is an insurance marketplace. Another source of coverage is the International Development Finance Corporation (DFC), a government agency that supports projects in emerging markets.
The DFC is a merger of the Overseas Private Investment Corporation (OPIC) and the Development Credit Authority. The merger was part of the BUILD Act, which was signed into law on October 5, 2018.
What Does Political Risk Insurance Cover?
Political risk insurance may cover a range of events, depending on the language of the policy. These may be created by acts of governments or by social or political unrest. Covered events may include:
- Expropriation, nationalization, or confiscation: Both expropriation and confiscation mean the taking of private property by a government for public use. For instance, a government seizes a building owned by a business and uses it to house public employees. The terms differ in that the owner of expropriated property is compensated while the owner of confiscated property is not. Nationalization occurs when a government takes ownership of private assets or an entire industry. For example, a government assumes ownership of an oil drilling operation owned by a U.S. company.
- Inconvertible currency: Governments may declare the local currency inconvertible, meaning it can't be exchanged for any other currency or transferred out of the country.
- Embargoes on imports or exports: A government may impose an embargo barring the import or export of certain goods or prohibiting trade with a specific country.
- Political violence: This term means violent acts committed by a government or individuals for political purposes. Examples are strikes, riots, civil commotion, war, insurrection, and terrorism.
- Breach of contract: A government might fail to fulfill the terms of a contract, rescind the contract, or force a business to renegotiate its terms. Alternatively, a government might refuse to pay damages awarded to a business as a result of an arbitration proceeding.
Events like these can be difficult to predict but can cause devastating losses. For this reason, any company considering expanding into an emerging market should consider buying political risk insurance.
Requirements for Political Risk Insurance
Businesses that purchase PRI represent a wide range of industries and company sizes, and they operate in many different countries. Because PRI buyers are so varied, insurers analyze each one carefully before deciding whether to provide coverage. Here is some information you may be asked to provide when seeking a PRI policy:
- A complete description of your business
- Type of legal entity (corporation, partnership, etc.)
- Company ownership (breakdown of shareholder equity)
- Name of the foreign enterprise
- Reasons you are seeking PRI
- A complete description of the foreign project or activity
- Details of any host government involvement in your project
- Locations where you will operate
- Amount of investment to be insured
- Details of any previous disputes with the host government
- Risks to be covered and term of coverage
- Political risk insurance protects businesses operating in emerging markets from losses caused by political violence or government acts.
- Political risk can affect manufacturers, exporters, lenders, investors, and non-profit organizations.
- PRI policies are typically written to cover a specific project or activity, so the policy's duration depends on the length of the project.
- You'll be asked to provide information about your business and your project when you apply for PRI.
International Development Finance Corporation. "Overview." Accessed Sept. 5, 2020.