What is Political Risk Insurance?

Political Risk Insurance

Definition and examples of Political Risk Insurance

Insurance that covers political risk (PRI) protects emerging market businesses from financial losses due to acts of violence or government actions.

Learn more about the process of purchasing political risk insurance.

What is Political Risk Insurance (or Policy Risk Insurance)?

American companies expand into emerging markets to grow. This is a country with a low-to-medium per capita income. These markets may have economic advantages but may also present risks.

Political risk refers primarily to government decisions, changes in economic policies, and social policy. These factors can harm a company’s financial position. Political risk can harm manufacturers, investors, lenders, creditors, investors, as well non-profit organizations. These businesses can buy political risk insurance to help them avoid financial losses.

A business could experience a loss of income when it is forced to suspend all or some of its operations because of political violence, acts of a government, or any other reason.

How Political Risk Insurance Works

Insurance covering political risks covers financial losses that can result from a range of different types of risks. It covers losses that occur during the policy’s term but won’t protect businesses from future events.

Political risk insurance policies generally cover a specific activity or project. The policy’s duration is determined by the length of the project. Policies may be in force for a month, a couple of months, or several years. There is no one standard PRI policy. It is therefore important to understand the terms. Policyholders are asked to review the entire contract, including definitions.

PRI is available from large multiline insurance companies and specialty insurers. This marketplace is an insurance company. Another source of coverage is the International Development Finance Corporations (DFC), which is a government agency that supports projects within emerging markets. 1

What Does Political Risk Insurance Cover

A policy may provide coverage for political risk insurance. The language of the policy will dictate the extent to which it covers. These can be created by acts from governments or social or political unrest. This may include:

Confiscation, nationalization, and expropriation – Both expropriations (or confiscation) refer to the government taking private property for its public use. A government might seize a property that belongs to a business, and use it to house its employees. The terms differ in the sense that the owner or expropriated property owner is compensated and the owner of the confiscated property owner is not. Nationalization is the process whereby a government becomes the owner of an entire sector or private asset. For example, the government can take over ownership of a U.S.-owned oil-drilling operation.

Inconvertible currency: Authorities may declare the local currency inconvertible. This means it can’t possibly be exchanged or transferred outside the country.

Imports and exports prohibited A government might impose an embargo on certain goods or trade restrictions with a specific country.

Political violence.-This term refers to acts of violence committed by individuals or governments for political reasons. Strikes include riots, civil commotion, wars, insurrections, and terrorism.

Breach Contract: A government may fail to follow the terms and conditions of a contractual agreement. Might revoke the contract or require a business to negotiate its terms. Another option is for a government to refuse to pay damages to a business arising from an arbitration proceeding.

These kinds of events can be very difficult to predict and can result in catastrophic losses. Every company that plans to expand into an emerging market should buy political risk insurance.

Political Risk Insurance Requirements

PRI buying companies come from many different industries and sizes. Because PRI buyers come in a wide variety of sizes, insurers carefully evaluate each one before deciding whether coverage is available. Here’s some information that you might be asked to provide when you are applying for PRI coverage.

A complete description of your business

  • Type of legal entity (corporation/partnership etc.
  • Company’s ownership (breakdown shareholder equity)
  • Name of the foreign entity
  • Reasons you are looking for PRI
  • A complete description of the foreign project or activity
  • Details of any involvement by the host government in your Project
  • These are the locations you will operate
  • Sum of investment to insure
  • Details about any previous disputes with host governments
  • Risks that must be covered and the term of coverage

Key Takeaways

  • Protect your business from potential losses due to government violence or political risk insurance.
  • Political risk can be a problem for manufacturers, exporters or lenders, as well investors, non-profits, and investors.
  • PRI policies are generally written to cover one project or activity. Accordingly, the policy’s period will depend on the length of that project.
  • When you apply, you will need to provide details about your business and the project.

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