Political Risk Insurance

Protect Your Business From Instability

Police in front of orange-colored smoke
Image courtesy of [Ricardo Nuno] / Getty Images.

As its name suggests, political risk insurance protects a business from losses caused by political events, such as war and expropriation. This coverage is important if your business operates in an emerging market. 

Encourages Foreign Investment

Political risk insurance (PRI) covers loss or damage to physical assets caused by social or political disruption. It enables businesses to operate in countries that are prone to political turmoil.

If PRI did not exist, companies would have to forego some promising business opportunities because investors deemed them too risky.

For example, suppose that you own an importing business located in the United States. Your company could reduce its transportation costs by establishing a shipping facility in Country X. Unfortunately, no investors will provide financing for this project. Country X has not experienced any major political problems. However, its neighbor, Country Y, has suffered coups and social unrest. In a recent coup, the government seized the assets of some businesses owned by foreign companies. Your investors are afraid that the problems in Country Y will spread to Country X. They do not want any funds they provide to be confiscated by an illicit government.

You can make your project more enticing to investors by purchasing political risk insurance. This coverage will reimburse your firm for losses caused by the expropriation, damage or destruction of its assets by officials of Country X.

It will eliminate the primary risk to investors, and encourage them to invest in your project.

Unique Features

PRI differs from other types of commercial insurance in a number of ways. For one thing, political risk policies are tailored to a specific project. The insurer will consider the scope of your activities, the country where you plan to operate, and the risks of doing business there.

It will then draft a policy to meet your needs. Secondly, political risk policies apply over a long term. A single policy may cover a 15-year period. Thirdly, policies may be non-cancelable, meaning they cannot be cancelled by the insurer. Finally, the price and availability of PRI can change very quickly in response to political events. If you are doing business in a developing country, you should purchase PRI before problems occur.

Why You May Need It

Political risk insurance protects your firm against risks that aren't covered under a standard commercial property policy. Examples are government action and war. These perils are excluded under most property policies. The government action exclusion applies to losses caused by seizure or destruction of property by order of a government authority. The war exclusion eliminates coverage for war, including undeclared or civil war, warlike action by a military force, insurrection, rebellion, revolution, and usurped power.

Another reason you may need PRI is that most commercial property policies don't cover losses that take place in foreign countries. The coverage territory in a typical property policy is the United States and Canada. Political risk insurance is designed to apply outside the U.S.

What Does It Cover?

Some of the risks that may be covered under a political risk policy are listed below. The specific risks covered by an individual policy depend on the nature of the project, the country of operation, and the hazards that exist there. Note that some insurers may cover risks that others won't.

  • Expropriation, Confiscation or Nationalization Means the taking or conversion of private property or investments by the host government. For example, in 2012 the Argentine government seized a 51% stake in YPF, an oil company. Prior to the expropriation, the company was majority-owned by a Spanish company.
  • Political Violence Includes war (whether declared or not), revolution, insurrection, civil strife, riots, and terrorism. For example, political protests in Bangkok have caused considerable damage to property owned by businesses located there.
  • Currency Inconvertibility The risk that the local currency cannot be exchanged for another currency, such as U.S. dollars. For example, government restrictions prevent a U.S. firm operating in Nigeria from converting sales in nairas (the local currency) to U.S. dollars.
  • Import/Export Restrictions Bans, sanctions or actions by a government that inhibit the flow of products in or out of the country. An example is a sanction imposed by Russia in 2014 that banned the import of food from Western countries, including the U.S.
  • Breach of Contract Failure of a local government to fulfill promises it made under a contract. Also covers a government's failure to pay an arbitration award granted to the insured.

Where To Buy It

Political risk insurance is available from several large insurers, including AIG, ACE, Zurich, and Lloyd's of London. If you are interested in obtaining political risk coverage, contact your agent or broker

Another source of PRI is the Overseas Private Investment Corporation (OPIC). OPIC is the U.S. government's development finance institution. One of its goals is to help businesses operate in parts of the world that offer growth opportunities but may be politically unstable. To help fulfill that goal, OPIC offers political risk insurance. Business owners can apply for coverage by submitting a completed application. Applications are available on OPIC's website.

Article edited by Marianne Bonner