What is Political Risk Insurance (PRI)?
Insurance against political risk provides financial protection for investors, institutions and businesses who may lose money due to political events. The insurance protects against a possible financial loss caused by a government taking some action.
Insurance against political risk can cover a wide range of possibilities. These include expropriation, political violence, civil unrest, insurrection, the inability of local currency to be converted and repatriated, sovereign default, and acts of terrorism or war.
Takeaways from the Key Notes
- Investors, financial institutions and businesses who suffer financial losses due to political events are covered by insurance against political risk.
- Expropriation, violence political, default on sovereign debt, acts of terrorism and war are all covered by political risk insurance.
- Insurance against political risk is a comfort for companies that do business in developing nations.
- Multinational corporations, banks, exporters and infrastructure developers are all common companies who purchase insurance against political risk.
- Insurance policies that cover political risk can be extended to reduce the risks of doing business overseas.
Understanding Political Risk Insurance
emerging market may present great opportunities for business growth but they also carry greater risks than established markets. Political turmoil can cause assets’ value to drop dramatically or even be confiscated or destroyed. Businesses would be reluctant to invest in countries that have high levels of political instability, which threatens their assets and ability to function smoothly.
Companies that may purchase political risk coverage include multinational companies , exporters and infrastructure developers. The policies are tailored to the needs of each client. The policies can be customized to meet the needs of each client. They can cover multiple countries, have a longer term and include coverage for millions of dollars.
A business can confidently pursue activities that would otherwise be too risky to pursue if it knew they were insured against political risks for years. A business can proceed with confidence if it knows it is covered against political risks over a period of time.
Political Risk Insurance Examples
Insurance against political risk can be used to protect assets such as stock investments, international loans, purchase contracts and stock investments. A multinational corporation, Company ABC, has a contract with a foreign government to supply drones. After the shipment of all drones by Company ABC, the government is insolvent, and unable to pay for the remaining balance. Company ABC’s insurance policy would cover this loss.
In a similar way, a new government takes power and changes export regulations so that the drone shipment cannot enter the country. The loss would be covered by the political risk insurance of Company ABC.
Joe’s Car Shop is another example. An automobile manufacturer who has a plant set up in a developing nation faces the risk of losing it if a coup occurs in that country. After the coup, if the national government takes over all previously private factories, Joe’s Car Shop could be compensated for its loss by a political risk policy.
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- National Association of Insurance Commissioners. ” Center for Insurance Policy and Research : Political Risk Insurance.”
- American International Group. ” Political Risk Insurance.”
