Political risk insurance is a type of insurance that can be taken out by businesses, of any size, against political risk—the risk that revolution or other political conditions will result in a loss.
Political risk insurance is available for several different types of political risk.
This kind of political risk insurance is purchased by exporters, lenders, investors, and contractors with inventories, equipment, or other assets located in foreign countries. It protects against confiscation, expropriation, nationalization, and other foreign government actions which would deprive you of your rights of ownership or control of your assets.
Related political risks that are covered include forced abandonment, selective discrimination, business interruption, and “creeping expropriation” (a series of individual government actions which, taken together, effectively result in expropriation). This political risk insurance can also cover non-transfer of dividends, royalties, or other funds following your sale of an asset or disposal of an investment.
There are two types of political risk insurance relating to currency risks. One deals with the inconvertibility of local currency into hard currency and the other addresses the inability to transfer hard currency out of the country. Currency inconvertibility and transfer risk policies apply to losses resulting from financial crises, hard currency shortages, exchange controls, or arbitrary political decisions by a foreign government.
This political risks coverage protects local currency dividends, debt service, fees, return of capital, or non-payment of trade receivables by a foreign government or private-sector buyer (assuming, in the case of a private-sector buyer, that sufficient local currency has been deposited in the buyer’s bank).
This kind of political risk insurance protects against non-payment, loss of income, business interruption, loss of equity investments, or damage/destruction of physical assets due to political violence. Covered political risks include war, revolution, civil unrest, rioting, public strikes, armed uprising, insurrection, terrorism, sabotage, acts of malice, or other political violence.
When you’re selling to a foreign government or public-sector buyer, contract frustration insurance or contract repudiation insurance protects against non-payment or arbitrary non-honoring of your contract, either before or after your shipment of goods or performance of services. Political risk insurance is also available to protect against non- honoring of sovereign government payment guarantees, whether the buyer is in the public or private sector.
Other kinds of policies can be written to insure against the political risks of non-payment on your sales to private- sector buyers, for example to cover your sales to your company’s own subsidiary located in a market with high political risks or any buyer for whose receivables you will not or cannot purchase comprehensive export credit insurance but in any event who might be unable to pay due to expropriation, currency inconvertibility or transfer risks, political violence, or other government actions or political events that would be out of their control.
Exporters, importers, and investors can use this kind of political risk insurance to protect against losses resulting from cancellation of import or export licenses, as well as embargos, boycotts, sanctions, or decrees which could result in business interruption, non-payment of invoices, or other losses.
This kind of political risk insurance is purchased by exporters who put up guarantees, performance bonds, bid bonds, or stand-by letters of credit in support of contracts with foreign government or public-sector buyers. It insures against the buyer’s unilateral extension of terms or unfair calling of these kinds of “on demand” guarantees.