When insuring a company operating in a developing country, offering political risk coverage is one of the most important things an insurer can do.
You can find this protection from a financial institution, public agency, or private insurance company. While the details of each policy may differ, they all have the same goal- to protect companies in long-term projects and customers in new markets.
In emerging markets, there is always the risk that business delays and losses will occur due to political instability and upheaval. These risks are covered by political risk insurance. This blog post covers the political, financial, and economic issues political risk insurance can help you protect.
Political Risk Insurance Glossary
Contract Frustration or Contract Breach
Political risk insurance will cover the associated costs and losses if a foreign government breaches its contract for no reason. This makes these policies invaluable for risk management. These policies also cover contract frustration that may arise due to unforeseen circumstances such as political revolution. Such political events may make one party unable to sustain its end of the deal.
Political violence and upheaval
Civil unrest, armed rebellion, wars abroad, insurrection, civil disobedience, and other actions that cause upheaval can affect your profits or, worse still, jeopardise the entire project. Fortunately, these risks are covered by political risk insurance.
Nationalisation or Expropriation of Property or Assets
Political insurance compensates infrastructure developers who suffer financial loss if their property or assets are expropriated or nationalised. For example, Under Hugo Chavez, Venezuela seized and nationalised 11 oil rigs from Helmerich & Payne, a US-based drilling company. Thanks to political risk insurance, the rig owners were able to recover $43 million.
Inconvertibility of foreign currencies, inability to repatriate funds
There is the risk that even if a business transaction is successful in an emerging market, the funds may not be able to be converted back into the proper currency or that a bank or the government will block the funds from returning home. In such a scenario, the loss is compensated by political risk insurance.
Interruption of Business
Often, business interruption is covered along with other protected events. For instance, if business operations are interrupted by riots and protests, you may receive protection for the interruption due to the violence.
Payment Default by the Government
Your political risk coverage will cover you if a government refuses to pay you for your services or goods offered or supplied to them.
Suspension or Revocation of Import/Export Licences
In most cases, political risk coverage will compensate you for losses incurred due to the suspension or revocation of your licence for political reasons. However, this may not be true if you conduct illegal activities or violate import/export regulations.
Do Your Research – Coverage Varies By Policy!
Insurers offer different types of political risk insurance, and the cost will also vary depending on the assets you want to protect and other factors.
Getting help choosing a policy is important to protect your company from political risk. Niche Trade Credit is an insurance broker that has been working with top insurers for over a decade. We can help you find the right insurance product and get a better rate. Contact us today to discover more.
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