The policy provides financial protection to investors, banks, as well as businesses that could lose money due to political events. It protects you from the possibility that the government may take action that could cause a substantial financial loss.
The policy can be used to cover many scenarios such as confiscation (e.g. a government taking of property), political violence, and inability to convert local currency and return it, debt default, and acts of terrorism or war.
Key Takeaways
The policy covers investors, financial institutions, as well as businesses that may be affected by political events.
Expropriation and political violence are covered under the policy. Sovereign debt defaults, acts of terror, or war are also included.
Companies that do business in developing countries can benefit from political risk insurance.
Multinational corporations, banks, and infrastructure developers are some of the common companies that could purchase insurance for political risk.
You can lock in political risk insurance policies for a long time to lower the risk of doing company abroad.
Understanding Political Risk Insurance
Although the emerging market offers great potential for business growth they also pose greater risks than mature markets. Political instability can cause assets to lose their value, be destroyed or confiscated, or make them worthless. Companies would be reluctant to invest in developing countries where there are high levels of political instability. This could impact their assets and ability to run smoothly.
The following types of companies could purchase political risk insurance: multinationals, banks, infrastructure developers, and exporters. Every client can customize their policies. These policies can be extended to include multiple countries or can provide multimillion-dollar coverage.
Political risk insurance is characterized by the ability to lock in an insurance plan for many years. For example, you can lock in a policy for up to 15 years with one major issuer. Many business opportunities take many years to realize. Political conditions can quickly change. It is easier to take on risks if a company knows that it will be protected for years against all political events.
Examples of Political Risk Insurance
The policy can protect financial assets and stock investments. It also covers international loans. Company ABC, a multinational corporation, has a contract for drones to be provided to a foreign government. After the shipment, Company ABC makes and ships all the drones. But, after that, the government becomes bankrupt and is unable to pay the remainder owed. Company ABC’s insurance policy covering political risks would pay the loss.
A new government also comes to power, and the import regulations are changed so that the drone shipment cannot enter the country. Company ABC’s policy of political risk insurance would pay for the loss.
Multinational Companies How Can They Reduce Political Risk
For multinational corporations, political risks are the chances that a host country might make political decisions that could harm their profits or corporate goals.
Abiding political actions can be extremely detrimental such as widespread destruction as a result of revolution or financially such as the creation of laws that prohibit capital movements.
A change in government, legislature, military control, or other foreign policymakers could lead to instability that impacts investment returns.
Insurance for Political Risk
One of the best ways to avoid being forced to travel to a country with high risk is to buy political-risk insurance. Multinational companies can go to an organization that sells political risk insurance. They will be compensated if they are affected by adverse events.
Premium rates vary depending on the country, industry, risk level, and other factors. Therefore, it is possible for the cost of doing a business in one country to be significantly higher than another.
However, purchasing insurance for political risk does not guarantee that companies will receive compensation right away after an unfortunate event. Certain conditions must be met, including the need to try other avenues of recourse and the severity of the business’s impact. A company may need to wait months before it receives any compensation.