Political Risk Insurance Policies Overview
Investing in emerging markets around the world offers the promise of far-reaching opportunities and high rates of return. Both are appealing prospects. The growth of international trade has continued unabated for decades and is now approaching $20 trillion per year. It certainly seems that that’s where we’re headed, the political class worldwide is fully onboard and the United States and the other western democracies are marching inexorably towards globalism.
But, while opportunities in developing markets may be socially encouraged, they are still unpredictable and fraught with peril beyond what can be controlled by importers, exporters, investors or lenders. Those kinds of risks give even the most sophisticated investors pause when considering emerging market risk and reward. Deals and opportunities with seemingly limitless potential have powerful appeal, but there is also the very real fear that someone like Claude Rains will visit your new facility and be shocked, shocked that some activity or another is going on there.
Global Trade Funding can help reconcile these diverging interests. We can significantly limit your risk and all but eliminate emerging market angst with political risk insurance policies.
Political Risk Insurance Policies
Investing in emerging markets can be unpredictable, even for the most sophisticated investors. While developing markets are often enticing, promising tremendous opportunities and high rates of return, they also present a variety of pitfalls that are beyond the control of importers, exporters, investors or lenders.
- War, civil strife, coups and other acts of politically-motivated violence including terrorism
- Expropriation, including abrogation, repudiation and/or impairment of contract and other improper host government interference
- Restrictions on the conversion and transfer of local-currency earnings
Political risk insurance policies are often combined with our world class trade funding services to allow businesses to take advantage of commercially attractive opportunities in emerging markets, while also mitigating risk and becoming more competitive in the global marketplace. Political risk insurance policies are a recent innovation that offer comprehensive, and cost-effective risk-mitigation products to cover losses to tangible assets, investment value, and earnings that result from political perils. We can place political risk insurance policies for US investors, lenders, contractors, exporters, and NGOs for investments in more than 150 developing countries, including high-risk countries such as the Democratic Republic of Congo, Iraq, Afghanistan, and Pakistan. Coverage is offered for small and large investments that provide positive developmental benefits.
Currency Inconvertability Coverage
Currency exchange restrictions can have a disastrous impact on the commercial viability of your project, preventing you from converting and transferring profits from your project and return of capital, and ability to meet debt obligations. Political risk insurance policies can provide coverage against government actions that effect currency exchange such as:
- More restrictive foreign exchange regulations
- Failure to approve of or act on an application for hard currency
- An unlawful effort to block funds for repatriation
- Actions resulting in an inability to convert and transfer local earnings
Political risk insurance policies with inconvertability coverage can insure conversion and transfer of earnings, return of capital, principal and interest costs, technical assistance fees, and similar remittances. Coverage is not available for protection against currency devaluation.
Expropriation and Unlawful Government Interference
Political risk insurance policies can protect foreign investments against acts of expropriation and other unlawful interference by a sovereign government that dispossesses you of your fundamental rights in a project. Expropriation coverage protects against nationalization, confiscation and creeping expropriations which result in a total loss of the investment. Types of government interference that can devastate a project include:
- Abrogation, repudiation, or impairment of contract, including forced renegotiation of terms
- Imposition of confiscatory taxes
- Confiscation of funds or tangible assets
- Outright nationalization of a project
Political risk insurance policies can provide arbitration award default and denial of justice coverage for US debt and equity investors which protects the insured from non-payment of an arbitration award by a host government. Coverage may also be available for losses resulting from government corruption.
In recent years many places in the world face increasing political uncertainty and violence which can have a crippling effect on international investments. Political violence coverage provides compensation for equity assets, real property and income losses caused by:
- Declared or undeclared war
- Hostile actions by national or international forces
- Revolution, insurrection, and civil strife
- Terrorism and sabotage
Coverage is available for damage to covered tangible assets and income losses resulting from damage to assets of the foreign project caused by political violence or terrorism. Investors may purchase one or both types of coverage. In addition, coverage can be added for evacuation expenses, income losses if the political violence causes evacuation or forced abandonment of a project. Additional coverage for income losses resulting from damage to specific sites outside the insured facility, such as a critical railway spur, power station, or supplier can also be added.
Traditional expropriation coverage protects against nationalization, confiscation and regulatory action. Regulatory risk coverage can protect against regulatory actions specific to projects with renewable resources such as:
- Material changes to feed-in tariffs
- Critical changes to taxation or other regulations affecting the project’s ability to operate
- Revocation of licenses or permits necessary for the operation of a project
- Improper interference with carbon credit generation (under the UN Clean Development Mechanism or voluntary standards) or sales
- Denial of concessions, technical assistance, or forestry-related services agreement by a foreign government
Election of Coverage
Coverage elections for most equity and shareholder debt investments are based on a coverage ceiling and an active amount. The coverage ceiling represents the maximum amount of political risk insurance available for the insured project and future earnings under an insurance contract. Premiums are calculated based on the active amount, which represents the insurance actually in force during any contract period. The active amount under all coverage must equal the book value of the insured investment at a minimum, unless a lower coverage ceiling is elected. There is no charge for the difference between the coverage ceiling and the active amount.
For most other investment types, premiums are computed based on the maximum insured amount, the current insured amount, and a standby amount. Maximum insured amount represents the maximum insurance available for the insured investment under an insurance contract. Current insured amount represents the insurance actually in force during any contract period. The difference between the two is the standby amount. Separate premiums are charged for current insured amount and standby amounts. For loans, premiums are charged on the covered amount, the amount of disbursed principal plus accrued interest, less principal paid to date, and a standby fee is charged for undisbursed principal.