Meaning
Specialized coverage that protects businesses and investors against financial losses caused by governmental actions or instability. Using political risk insurance allows a company to operate in volatile jurisdictions by transferring the risks of expropriation or political violence to an underwriter. This instrument is a staple in project finance for emerging markets.
Risk Type
Coverage typically focuses on specific perils such as the seizure of assets by a foreign state. It also addresses the inability to transfer local currency profits into a foreign currency like the dollar or euro through political risk insurance. This protection gives lenders the confidence to provide debt for long-term infrastructure projects.
Recovery Process
Claims are triggered when a government act deprives the investor of its fundamental rights for a sustained period. The policy requires a waiting period, often 180 days, to confirm that the interference is permanent. After this time, the insurer pays out the book value of the investment or the outstanding debt under the political risk insurance.
Policy Benefit
Underwriters often provide political influence because they are backed by multilateral agencies or large private syndicates. Governments are less likely to seize assets when they know the political risk insurance provider will pursue a subrogation claim.
