Understanding Political Risk Coverage

Originally published in Risk Management Magazine, June 2014

The economic crises and political upheavals occurring around the globe the past few years have highlighted the risk of engaging in international trade and investment. In just the last five years, entire industries and business entities have been nationalized in Argentina, Bolivia, Greece, Ireland, Pakistan and Venezuela, among others. Foreign bank deposits were effectively seized and heavily devalued during the Cypriot bank crisis of 2012-2013. Currency controls are currently in effect in dozens of countries around the world, and are subject to change seemingly at a whim.

These events have created a heightened interest in political risk insurance. Whether you already have a policy, are facing renewal or are considering purchasing a policy for the first time, a careful review of policy terms will be worthwhile. Political risk policies vary greatly from company to company, including those sold by the Overseas Private Investment Corporation (OPIC), a self-financing government-created entity. Beyond the differences among different providers, most policies are specifically tailored from an assortment of possible coverage options, and it is critical to be certain that your company has selected the best and necessary options that it needs for its operations.

Coverage Grants and Types

Most political risk policies offer some combination of the following types of coverage:

Expropriation risk covers the possibility that the host government will seize all or some substantial portion of your assets in-country, or the assets of a borrower or business partner so the borrower or partner is unable to make payments or otherwise fulfill their obligations to you. Moratorium risk covers the chance that a government does not allow a borrower or business partner to make payments (e.g., a moratorium on debt payments, foreign debt payments, banking in general, etc.). Currency transfer risk and inconvertibility can cover a host of ills, including when the government does not allow a borrower or counterparty to 1) convert its own currency into dollars; 2) convert to the local currency to make payments; 3) or to transfer funds out of the country to convert or transfer local earnings. Some policies may also include coverage for "risk of unavailability of U.S. dollars in the market," which concerns a regime in which currency exchange or transfers are nominally legal but other government policies made it...