Political Risk Insurance crucial as protection against increasing political instability
27 January 2022
The ongoing threat of a Russian invasion of Ukraine has emphasised the need for foreign investors to protect themselves from losses related to political instability.
Political risk insurance (PRI) is an important tool for companies to help ensure they are adequately protected given the ever changing geopolitical landscape. Multinational organisations and financial institutions need to fully understand the risks involved in current and future global projects.
Political risk refers to government decisions, social changes, economic policies, and other factors that can negatively impact on manufacturers, exporters, lenders and investors.
Under most political risk policies, the investor is generally required to show that an action or inaction by the government of the host country caused an expropriation, selective discrimination, political violence, nationalisation, currency inconvertibility, sovereign payment default, wrongful calling of on-demand guarantees and bonds and non-transfer or other event that falls under one or more of the specific coverages in the policy.
Policies can be tailored to include specific requirements such as: Non-Payment Insurance for Project Lenders against failure of qualifying sovereign governments to meet debt obligations: Political Risk Insurance for Importers and Exporters providing protection against loss due to political instability, including product confiscation and non-payment: Political Risk Insurance for Financial Institutions and Capital Markets which protects institutional lenders and capital-bond markets against risks from political instability.
There is also the option of taking out Political Risk Insurance for Project Multinationals against losses from an individual project. Coverage can extend to a single country or multiple countries. A policy can also include Political Risk Insurance for Contractors to provide coverage to construction, engineering, and other contracting firms against associated losses due to political upheaval or government action.
However, it should be noted there are no set standard forms for PRI coverage, and the provisions can vary greatly with a significant impact to the policyholders. In a hardening market, it is vital policyholders understand the notice of claim and other conditions in the PRI policy and obtains the assistance of experienced PRI coverage experts.
A complete restriction of the operations of the foreign enterprise is not necessarily required to trigger coverage. It is essential that an investor shows that the loss was caused by the government’s actions or inactions and not the investor’s own conduct.
The majority of political risk policies require the triggering event or conduct by the government of the host country remain in effect for a certain period of time before a loss is covered. This “waiting period,” which typically ranges from 90 to 180 days, functions essentially as a deductible/self-insured loss.
Many PRI policies are governed by English law, and the UK’s recent Insurance Act 2015 outlines new specific elements an insurer must prove to void or limit coverage. Another common exclusion invoked by PRI insurers is an exclusion for loss caused by the failure of the investor or the foreign enterprise to comply with the laws of the host country.
W Denis place insurance around the world and have direct access to Lloyd’s of London, if you wish to discuss your insurance requirements, please visit www.wdenis.eu or contact Vida Jarašiūnaitė firstname.lastname@example.org