Political Risk Insurance

From Open Risk Manual

Definition

Political Risk Insurance (PRI) is a form of insurance that provides protection from certain types of Geopolitical Risk, such currency Transfer Risk, restrictions, expropriation, and political violence[1]

Insurance Providers

Political Risk Insurance is offered by national, multilateral, or private insurers

Usage

Political Risk Insurance is used by investors to mitigate country risks associated with emerging market debt and equity investments, and lending. The political risks covered under these policies are typically classified into three main categories:

  • Currency inconvertibility (CI) coverage protects against losses caused by currency transfer restrictions (Transfer Risk). Typically, CI coverage applies to the interruption of scheduled interest payments or repatriation of capital or dividends due to currency restrictions imposed by the host government.
  • Confiscation, Expropriation, and Nationalization (CEN) coverage protects against losses caused by various acts of expropriation. Coverage usually applies to outright confiscation of property or funds.
  • Political Violence protects against losses caused by war, civil disturbance, or terrorism. Coverage is usually limited to “politically motivated” violence.


Issues and Challenges

  • It can be difficult to determine if a loss was directly caused by an act of political violence
  • Creeping expropriation: where a government undertakes a series of actions that are, in sum, de facto expropriation, even though none of the individual actions is sufficient to trigger the coverage
  • Unpredictability of losses: The infrequency and uniqueness of political events means a lack of credible data and “off-the-shelf” statistical models on which to base actuarial estimates of future losses

Reference

  1. An Overview of Political Risk Insurance, K Hamdani, E Liebers, and G Zanjani, Federal Reserve Bank of New York May, 2005