7.3 Political Risk Insurance and Mitigation Techniques

Political risk insurance protects businesses from losses due to political events in foreign countries. It's offered by government agencies, multilateral organizations, and private insurers, covering risks like expropriation, currency issues, and political violence.

This insurance is crucial for companies expanding globally, especially in emerging markets. It helps mitigate risks that regular insurance doesn't cover, encouraging foreign investment and supporting economic development in challenging environments.

Political Risk Insurance Providers

Government and Multilateral Agencies

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Top images from around the web for Government and Multilateral Agencies

• 

  MIGA Annual Report 2012 View original

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• 

  MIGA's Financial Sector Guarantees in a Strategic Context View original

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• 

  International Political Risk Management : Looking to the Future View original

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• 

  MIGA Annual Report 2012 View original

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• 

  MIGA's Financial Sector Guarantees in a Strategic Context View original

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• Political risk insurance offers protection against financial losses caused by specified political events (war, expropriation, currency inconvertibility) in a host country
• OPIC (Overseas Private Investment Corporation) is a U.S. government agency that provides political risk insurance to U.S. businesses investing in developing countries
  • Offers coverage for currency inconvertibility, expropriation, and political violence
  • Aims to encourage U.S. private investment in emerging markets and developing economies
• MIGA (Multilateral Investment Guarantee Agency) is a member of the World Bank Group that promotes foreign direct investment in developing countries by providing political risk insurance
  • Offers coverage for currency inconvertibility, expropriation, war and civil disturbance, and breach of contract
  • Insures investments made by investors from a MIGA member country into a developing member country

Private Insurance Market

• Private insurance companies, such as Lloyd's of London and AIG, also offer political risk insurance
  • Policies can be customized to meet the specific needs of investors
  • Private insurers often have higher coverage limits and more flexible terms compared to government and multilateral providers
• Reinsurance companies, such as Munich Re and Swiss Re, provide additional capacity to the political risk insurance market by sharing a portion of the risk with primary insurers
  • Allows primary insurers to offer higher coverage limits and insure larger projects
  • Spreads risk across multiple insurers, increasing the stability of the political risk insurance market

Types of Political Risk Coverage

Expropriation and Government Interference

• Expropriation insurance protects against the loss of investment due to nationalization, confiscation, or other government actions that deprive the investor of their property rights
  • Covers both direct expropriation (outright seizure of assets) and creeping expropriation (gradual erosion of ownership rights through regulations or taxes)
  • Example: A foreign government nationalizes a privately-owned factory, seizing control of the assets without providing adequate compensation to the investor
• Contract frustration coverage protects against losses arising from the host government's interference with or termination of a contract with the investor
  • Covers situations where the government unilaterally changes the terms of a contract or prevents the investor from enforcing their contractual rights
  • Example: A host government cancels a concession agreement with a foreign investor, preventing them from operating their business as planned

Currency and Political Violence Risks

• Currency inconvertibility protection guards against losses due to the inability to convert local currency into hard currency (USD, EUR) and transfer it out of the host country
  • Covers situations where the government imposes exchange controls or restricts access to foreign currency
  • Example: A foreign investor is unable to repatriate profits from their subsidiary due to the host government's implementation of capital controls
• Political violence coverage protects against losses caused by war, civil unrest, terrorism, and other forms of political violence
  • Covers physical damage to assets, business interruption, and evacuation expenses
  • Example: A foreign-owned factory is damaged during a period of civil unrest, forcing the investor to suspend operations and repair the facilities