Assessing political risks with insurance
In the world dictated by global economy demand things are getting quite close and inter-related no matter where your business is
. And unpleasant things like political instability, riots, wars and revolutions within one country can strongly influence the business in another part of the world. That's why businesses working at the international market need political risk insurance in order to cope with such risks.
What is political risk Insurance?
Political risk insurance is a form of business insurance that covers the financial losses influenced by social or political instability within a give country. Political risk insurance can also act an investment stimulation tool when working with international partners at it delivers a high degree of stability to any financial project. From this point of view, even small businesses may require political risk insurance when working overseas.
Let's take an example. Say, a small American importer wants to take advantage of cheap labor in another country and set up a shipping facility there. But the constant social unrest has made it quite hard to set up any business there and the last coup has lead to seizure of all foreign investments in the region.
The business can use political risk insurance for this particular project. This type of business insurance will cover the damage to the property if it were taken or destroyed during a political or social event. By ensuring that this damage is covered, it will be much easier to draw investments into the project.
What will the political risk insurance policy pay for?
Political risk insurance isn't quite similar to typical business insurance. Each policy is usually tailored for a certain project or company in order to cover the exact events that need to be insured against. Still, besides the highly customizable nature of such large and small business insurance policies, a typical political risk insurance policy will include coverage against three major factors:
- Expropriation - This is when the government of a given country is converting any private property into state property by simply taking away any business even from foreign investors. There are many examples to this in the 20th century, one of the most recent ones being the nationalization of oil production in Bolivia.
- Political violence - This form of coverage will pay for the losses caused to your assets during political or social events such as riots or revolutions. Street battles in Iran can be a very good example for such events.
- Currency inconvertibility - This coverage will help assure your business with necessary financing in case the local currency is impossible to convert into a hard one, or its devaluations strongly affect your business or project.
Whereto get political risk insurance?
Political risk insurance is not your typical big or small business insurance so it will be hard to get such a policy from a common insurance provider. Quite often these policies are sold through private-public partnerships at host countries that are interested in attracting new investment projects to the area. A good source of information on brokers and intermediaries offering political risk insurance is the World Bank report.
Assessing political risks with insurance
By: David Mayer
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