For most developing countries, the idea of attracting foreign investors and sustaining them is generally the exclusive means to promote developments locally at different levels through tax revenues. While this presents a good opportunity for foreign investors to expand their operations to emerging cross-border markets, it isn’t without risks. Political risk is one of the threats that foreign companies face when investing in emerging markets.
What Is Political Risk?
Political risk is the possibility that changes in political decisions, legislation, or policy of a country, impair the business environment in such a manner that investors lose their expected returns or are a part of their investment. Hence, when you invest in a country that’s at risk of political turbulence and social instabilities, it makes sense to cover your business with political risk insurance.
Political risk insurance, in this case, is a form of investment insurance available for foreign investors with overseas operations in growing markets. It helps protect a business against losses resulting from political violence, acts of terrorism, or breach of contract by the host government. This insurance coverage protects a company’s assets and equipment held in the host country.
What Is Breach of Contract?
Breach of contract can occur in different ways. For example, the host government could fail to honour sovereign financial obligations or seize your property. Your political risk policy will compensate you for damages arising from these actions. The host country may also make your business operations illegal, violate your initial contract with them, or take other actions that put your business at risk. This constitutes a breach of contract and will be covered in your insurance policy.
The Scope of Political Risk Insurance
As an effective risk mitigation tool, political risk insurance covers a broad range of political risks. However, not all risks are covered under this policy. Thus, you need to consult a political risk insurance professional to know what works for your business. Examples of the risks covered by the political risk insurance policy include;
- Political violence – This protects companies against losses arising due to civil disturbances, hostile actions by national forces, insurrection, revolution, and more.
- Coverage for expropriation – This coverage safeguards investors from government acts that deny the investor the control rights of their investment.
- Coverage for currency inconvertibility – This protects investors against the inability to convert local currency into cold cash or transfer hard money outside the host country.
Types Of Political Risk Insurance Providers
- A multilateral investment guarantee agency, such as MIGA or World Bank Group
- Public or state-owned provider
- Private insurers or export credit agencies such as Niche Trade Credit
Contact Niche Trade Credit
Political risk insurance can help protect your investments from political disturbances and allow you to transact freely across the border. At Niche Trade Credit, we can help assess the risks your company faces in foreign emerging markets and advise on the best policy for your business. Get in touch with us by calling 02 9416 0670.
*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.