For institutions and companies with overseas investments, political risk is a fact of life. Political risk insurance policies aim to mitigate cross border risks for various organisations, including equity investors, importers, exporters, financial institutions and contractors plant and equipment, to name just a few.
For importers and exporters, political risk polices offer protection from having contracts frustrated due to defined risks which could affect the purchase or supply of services and goods, whilst for equity investors, Besso explains, such policies protect them against the risk of losing a foreign enterprise due to action taken by the government. In regards to contractors’ plant and equipment, this type of policy protects against the risk of losing plant and equipment as the result of political violence, war or government action.
A policy of this kind provides protection against the risk that political conditions such as revolutions will result in a loss. According to Besso, political risk insurance offers coverage for several different forms of political risk, including coups, strife, terrorism, war and other politically motivated acts of violence. Polices of this nature may also cover losses which are caused by improper interference by a host-government, repudiation, abrogation as well as restrictions on the transfer or conversion of local currency earnings.
Much like with any insurance, Besso says, the exact scope of the coverage provided will be determined by the terms of each individual policy. As globalisation increases, with more and more businesses expanding overseas, this area of underwriting is still evolving to meet the needs of investors and business owners. Although there are some political risk insurance policies which are tailored for specific situations, most will have a standard series of circumstances which will be covered.
Besso adds that there is normally a waiting period, and this stated amount of time must be exceeded before a payment is made for losses due to things like currency inconvertibility and contract frustration. One of the main reasons for this waiting period is that the policy is not intended to pay for temporary currency or confiscation restrictions, which will cease within a reasonable time period.