What is Political Risk Insurance?

2015-09-14 13:05:25

You must have heard about the term risk management. It is excessively used in any topic related to the business world.  Insurance of the risks involved with your business is definitely the smarter thing to do. This clearly means that you need to educate yourself regarding all the possible risks involved with your enterprise in order to carry out the process of risk management effectively. Political risk insurance is not a term known by the general public. However if you’re looking to start up a company or business of any sort then it is high time you educate yourself in this matter.

What is Political risk insurance?

You can understand the concept of political risk insurance by thinking of it as a type of insurance that protects the business against any kind of political risk. This insurance can be acquired by any business of any type and size in order to carry out its transactions in a far safer manner. The political risks which organizations seek to protect themselves against include risks of revolution along with other kinds of political conditions which can create loss for the organisation. The definition itself is a clear indicator for the need of management of such a risk.

Political risk insurance is generally available for multiple types of political risks. These include the following:,

Political violence including revolution, war, terrorism, insurrection or civil unrest

Confiscation or assets or expropriation by the government

Frustrations by the government or contracts repudiation

Inaccurate calling of letters of credit or guarantees on demand

Business interruption

Foreign currency inconvertibility

Inability to carry out repatriation of funds

The insurance policy and its terms are responsible for governing the coverage scope of any insurance and same is the case for political risk insurance. This particular type of insurance generally consists of a rather dynamic underwriting. Due to the increased globalization there are increased numbers of corporations carrying out businesses in a more diverse platform across the globe. The number keeps on increasing with passing of each year. Generally changes taking place in the business world include offerings of personalized and new products and high growth along with a more significant role of private capital.

Majority of the times the political risk insurances are manuscript-ed in the case of specified situations. There are standardized forms for the coverage of any issue relating to any major political insurer. The policies which have been manuscripted are used for more complex and larger investments as a set norm. When it comes to the source of political risk insurance the public agencies come in to play. Private insurance companies exist for the very same reason as well. It is highly recommended that organizations should make use of a specialized broker due to the diverse range of options which are available.

In order to develop a better understanding of political risk you should take into consideration the example of multinational enterprises and banks. These organizations are faced with a huge number or risks which on conduction of their business overseas; they are faced with risks which have the potential of being removed and mitigated by conduction of due diligence on all the parties involved. The process of due diligence is also conducted on the viability of the economic condition of the business proposed. There are certain risks which can be difficult to be predicted by the investors and lenders.

Risks of such include both commercial and non-commercial risks along with other forms of political risks. The political risk insurance basically serves as an important tool for businesses in terms of mitigation risk management against adverse actions and inactions of the government. The PRI basically offers you an environment with improved stability for investments in the developing countries which ultimately leading to the unlocking of better accessibility to finance.

Using PRI

There’s obviously a certain manner in which optimal usage of PRI can be assured for a particular business. PRI is essentially used by multinational enterprises for the purpose of establishment of a foreign direct investment or for exporting in order to boost up their confidence in the market which is generally perceived to be higher in risk compared to their home markets. An insurance of such helps in offering peace of mind to the investors. The investors are able to concentrate on what matters most that is the commercial aspect of their investment due to the comfort which is offered to them by the PRI provider. The sense of comfort allows the investors to focus with the knowledge that their potential losses are being avoided by the PRI. Moreover there is hope for reimbursement of their loss relating to any political cause.

Investors are generally faced with certain kinds of constraints from the lenders even after having the comfort of investment in emerging markets and economies owing to the PRI. Lenders are known to avoid country risk and PRI offers reduction in the provisioning requirements posed by the lenders and offers them a sense of comfort. The process then generally enhances the access to financing. The amounts, loan tenors and interest are included in the improved access.

Who provides PRI?

The risk of mitigation is offered by the political risk industry to the various kinds of multinational enterprises and lenders out there through provision of insurance against adverse actions and non-actions of the government. The private PRI providers are obviously profit oriented. They offer companies and individuals PRI coverage for both the developed and developing countries for a variety of tenors. Most of these public providers are national export credit agencies generally referred to as ECAs. These tend to offer coverage of both export trade transactions and the long term investments. These are generally supportive of investors and lenders belonging to their home countries that are entering developing countries.

You may also get to notice mandates on their parts in order to offer support self sustaining and development of those from their home countries. Others include multilateral agencies such as that of MIGA which offer PRI and they tend to have specially created programs for the medium and small investors, banks and companies from the developing countries. Each PRI provider has their own:

Coverage

Pricing

Tenor

Eligibility

Host country

Sector

Type of investment

It is hence advised to the investors and lenders that they should get in contact with a variety of PRI providers before deciding upon one in order to find the perfect match for their particular situation and conditions.

The Berne Union

The official name for the Berne Union is the International Union of Credit and Investment Insurers. It is basically the leading organization of international nature. It serves rather as a community meant for the exporting of credit along with the investment insurance industry. There are more than fifty member companies of the Berne Union across the globe. The community has a shared Secretariat which is based in London. The Berne Union is known for actively facilitating trade of cross border nature by offering support to the international acceptance of sound principles in foreign investments and export credits. Moreover it also provides a good forum for the professional transactions amongst the union’s members.

PRI Trends

It was back in the year 2009 that MIGA published its report for the World Investment and Political Risk. The report basically examined the general trends taking place in the global economy along with the foreign direct investment and the corporate perception of strategies of risk mitigation and political risk. Moreover the most recent of developments taking place in the PRI industry were taken into consideration in the report as well.

The people responsible for the examination of political situation and social conditions of a particular country are known as political risk analysts. These people help in studying the political conditions of a particular region and its market in order to determine the exact level of political risk involved in terms of investment. These professionals help organizations by offering them information relating to the stability of the government along with:

Land right issues

Crime levels

Currency convertibility

Factors affecting return on investment

Generally the analysts are interested in gather information relation to the area in order to determine definitive causes and sources along with the levels of risk. This information is then passed on to the decision makers in order to help them in making sound decisions for their companies. These individuals are also sought after for provision of solutions and recommendations for the overcoming of potential and current risks of a particular area.

How to get experience as political risk analyst?

A field of such can only be pursued provided that you have keen understanding of the elements involved otherwise your career will seize to have any kind of growth. People in this particular field are advised to develop and enhance skills relating to accounting and finance along with good understanding of political processes. Individuals should definitely consider internships to gain hands on experience before starting their jobs.