Insuring political risk

Political risk insurance can protect businesses in locations and against perils that conventional insurance policies do not cover. Issues related to increasing globalisation, political and economic instability and protectionism have made it an important line of insurance for companies seeking to safeguard their business interests abroad.

In the article “Political risk insurance: A primer,” Milliman actuaries Derek Newton and Laura Hobern discuss what types of events this insurance covers and pricing considerations. The authors also discuss the reasons its demand has increased considerably. Below is an excerpt from the article.

Political risk insurance is commercial insurance aimed to protect businesses and business ventures in locations and against perils that other conventional insurance policies would not cover. There is no standard political risk product. Instead, these policies tend to comprise cover against a variable bundle of perils that can include:

Cover can be long term or short term, depending on the event being covered. For example, cover for trade risk might last for only 30 days, but cover for a major infrastructure development might be in place for several years. In fact, contracts that are five to seven years long are normal, though very few insurers will provide cover for longer than a 10-year period. The policies, however, may not last the full term. Coverage is often one-off, especially if it is project-based.

This translates to plenty of new business in the market with a relatively high acquisition cost, but very little renewal business.

Political risk insurance is not new, but it is not yet a fully mature market. The private market started in the 1970s, and business is written primarily through the major financial centres (i.e., London, New York, Singapore and Paris). There are state players, too, such as the Overseas Private Investment Corporation (OPIC) in the United States. This government agency has been helping American business invest in emerging markets since 1971.

Increasing globalisation and the increasing willingness of commercial enterprises to operate outside their national boundaries are driving demand for political risk cover. So, too, are the rise of nationalism and political populism in addition to continuing political instability in various parts of the world. All of these factors are increasing the awareness of commercial enterprises regarding the risks they are running when operating abroad and thus increasing their appetite for cover.

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