Political Risk Insurance

Political risk insurance refers to a tool deployed by various businesses to reduce and manage different risks due to political reasons, government inaction, or adverse actions. It aims to protect large institutional investors, corporations, or financial institutions from substantial monetary losses arising out of government action.

Companies purchase it for fixed and mobile assets, project finance, foreign direct investment into infrastructure sectors, mining, oil and gas, including asset finance, and trade finance. It helps unlock better access to finance and more accessible investment in developing nations. It protects multinational companies from adverse international scenarios. 

Political risk insurance is defined as a type of insurance providing financial protection to businesses, financial institutions, and investors against loss of assets, income, and money due to risky political events in an underdeveloped country. It gives coverage to a multitude of risks like political riots, sovereign debt default, and acts of war and terrorism. The list of buyers of such political risk policy includes construction and engineering contractors, multinational corporations, financial institutions, capital markets, importers and exporters, project lenders, and foreign investors. 

It customizes its insurance coverage to the needs of its clients. It provides insurance coverage to multinational companies in either one or multiple countries where they conduct their businesses. The policy term ranges from short-term to long-term. Therefore, insurers have the option to launch as many varieties of products as they can to cover requirements and tailor them accordingly to the investor's particular demands.

It has become a lucrative business but has a high cost for insurers. Investors get security on their investment and risk mitigation on country-related risks in emerging market debts, along with equity investments and credit. However, it is not freely and consistently available within high-risk markets. Moreover, it is expansive, reflecting the limited desire and strength to take up such high-cost risks.

Further, political risk insurance providers like DFC political risk insurance & MIGA political risk insurance provide credit and political insurance coverage. It has played a crucial role in the development of emerging markets and their investment; hence, it will continue to expand despite certain limitations associated with it. 

As per the latest industry standards, listed below are the benefits and coverage of the insurance:

• It protects the finances of investors and companies against political events. 
• It has coverage related to various risks like political violence, terrorism, war, and others.
• Offers fully customized insurance coverage to clients as per their unique needs and market conditions, providing long-term coverage.
• It reduces political risk for companies to a great extent in countries with unstable or emerging markets. 
• Insurance coverage has long-term validity that can be extended, giving a long duration of security to focus on their work.
• Specialized insurance coverage sometimes also offers the coverage of accidental death, disability, or resignation of a key person.
• It acts as a one-stop and extensive protection, providing coverage against taxation changes, regulatory changes, and nationalization. 

It excludes coverage of some events and sectors like:

• Non-discriminatory measures of general application undertaken by the government in the public interest are excluded.  
• It may also exclude the conversion or repatriation of funds, as well as the export or import of goods and tangible assets from the host country. 
• Damages arising from war are categorically excluded.
• It requires entirely motivated attacks of political id, ecological, or religious nature to be included in its policies; otherwise, political violence will be excluded.
• Sometimes, policy language also excludes some events like political violence under certain conditions.
• This excludes contract frustration, which means the inability to fulfill contract obligations. 
• Policy type may also exclude some risks, such as lender or equity.

Let us use a few examples to understand the topic.

Example #1 

A news report published in March 2024 discusses the launch of a new division by United Risk to handle political risks. The division has been named as applied credit underwriters, which is entirely focused on the management of global risk concerning politics and credit contracts. Its leader, Bernie de Haldevag, says that the move serves to meet the demand for specialized management of political and credit risks. 

It said that the company was attracted to it because the world's biggest problems have led to high-level risk to large clients in the sector that needed such insurance coverage. The President of the company emphasized that its expansion and foray into London led to the creation of a new division. He underscored that the company wants to provide proactive solutions to its clients through proactive units.

Example #2

Let us assume the insurer Old York Insurance Company has launched a new insurance product called Politico. Politico has had its policy valid for five years, offering extensive coverage against different political risks that may disrupt a company's operations. Old York insurance company offered the same Politico to its large client Heavy Electrical Limited, which has its operations in Uganda infested with political risks everywhere.

Hence, after Heavy Electrical Limited took the policy, it got coverage from losses against expropriation to the government, currency exchange restriction, and civil war. Hence, the company can now totally focus on its core business functions in Uganda under the blanket of peace and assurance of safety.

Since it is a big-ticket insurance that comes at a considerable cost to investors and companies alike, its claim process needs to be completed using the following steps:

• First, read the insurance policy carefully and understand the policy's coverage, terms, and conditions while initiating insurance claims.
• Secondly, collect and document all the concerning details regarding loss, like the event causing the loss, assets value, affected investment, and any other supportive document.
• Make immediate contact with the insurer on an urgent basis, reporting the incident and losses to start the claim process. All the detailed information must documented to be given to the insurer about loss loss-causing events.
• One should then wait for their claim review and approval by the insurer as the process can be quite lengthy due to the involvement of losses due to violence or political unrest needing time to investigate the quantum of losses.
• Lastly, one should also take legal and finance experts to expedite the process and get the claim quickly in one's favor without much delay.