What is political risk insurance?
Multinational enterprises and banks face a number of risks when conducting business overseas. Some of these risks can be removed or mitigated by conducting due diligence on the parties involved and on the economic viability of the proposed business. Other risks are harder for investors or lenders to predict. These include some commercial risks and, non-commercial—or political—risks. Political risk insurance (PRI) is a tool for businesses to mitigate and manage risks arising from the adverse actions—or inactions—of governments. As a risk-mitigation tool, PRI helps provide a more stable environment for investments into developing countries, and to unlock better access to finance.
Whether planning to establish a direct investment abroad or as exporters, multinational enterprises use PRI to enhance their confidence in markets perceived to be riskier than home markets. PRI allows investors to concentrate on the commercial aspects of investments, with the comfort that someone else—PRI providers—will help them avoid potential losses, or reimburse them in case of a covered loss related to political causes.
Even when investors are comfortable investing in emerging markets or frontier economies, they frequently face constraints from lenders. Lenders often must provision for country risk, and PRI may, in certain cases, reduce the provisioning requirement, and generally gives comfort to lenders. This can improve access to financing, including the amounts, interest, and tenor of loans.
Who provides PRI?
The political risk insurance industry helps multinational enterprises and lenders mitigate risk through insurance against adverse government actions or war, civil strife, and terrorism. Private PRI providers, which are profit-oriented, offer coverage for developing and developed countries and for varying tenors. Most public providers are national export credit agencies (ECAs), which may cover both export credit/trade transactions, as well as longer-term investments. ECAs usually support investors and lenders from their home country going into developing countries, and may also have mandates to support development and be self-sustaining. Finally, several multilateral agencies, such as MIGA, also provide PRI, these providers often have special programs for small and medium investors, companies, and banks from developing countries.
Coverages, pricing, tenor, and eligibility vary widely by PRI provider, host country (destination of the investment), and sector or type of investment. Investors and lenders are strongly encouraged to contact various providers to find the coverage most suited to them.
The Berne Union
The Berne Union, or officially, the International Union of Credit & Investment Insurers, is the leading international organization and community for the export credit and investment insurance industry. The Berne Union has more than 50 member companies spanning the globe. They share a Secretariat based in London.
The Berne Union actively facilitates cross-border trade by supporting international acceptance of sound principles in export credits and foreign investments and by providing a forum for professional exchanges among its members.
Since 2009, MIGA has published its
World Investment and Political Risk report, which examines general trends in the global economy and foreign direct investment, corporate perceptions of political risk and risk-mitigation strategies, as well as the latest developments in the political risk insurance industry.