Managing Political Risk

world.1Considering recent political and economic events, many companies are reviewing old risk management policies and procedures, in case updates are needed. However, some of the risk management processes that should be reviewed are not being considered as they have been viewed as too expensive or impractical. Such is the case with political risk insurance.

Companies face many kinds of risks when engaged in offshore projects; of course political risk is one of them. This comes about when a government changes its policy, ideology or even it’s itself which creates instability, disorder, strikes, riots, etc.  What must be done to manage such a risk?  Political risk insurance comes to mind, but some forms of political risk insurance that are offered by capital –exporting nations ( such as OPIC, etc.) is subject to politically motivated conditions or motivations that may not take the needs of the investor into account.  Case in point- OPIC can only operate in countries which have a bilateral investment treaty with the US.  If you are a US investor trying to invest in a country which lacks a bilateral investment treaty with the US- you are out of luck when trying to obtain political risk insurance from OPIC.  This is true of outer countries which supply similar political risk insurance through export development programs.

The answer for some companies therefore, is to consider obtaining private political risk insurance. Due to the increased use by some companies of political risk insurance from government agencies as well as a lessening of perceived political risk, private political risk insurance offerings have exploded.   Several markets provide private political risk insurance including Lloyds of London insurance syndicates as well as groups operating under a reinsurance treaty that are controlled by an underwriter.  There are advantages to this.

As private political risk insurers have no political agenda to worry about, there are normally no political pre-requisites for the issuance of insurance. The host country doesn’t need to be poor and the investor can come from any part of the world.  Also, the private insurance approval process can be much faster than the approval process of governmental agencies.  Of course it should be noted, that unlike governmental agencies, private political risk insurers are in business and therefore the coverage offered by them can be more expensive than compared with their government counterparts.

Remember, there are numerous aspects of political risk that must be considered when investing in emerging markets.  A country risk guide or a US bank lists the major elements of political risk as follows:

1. Government Stability

2. Socio-economic conditions

3. Investment climate

4. Internal conflict and military intrervention

5. External conflcit

6. Corruption

7. Religious and/or ethic tensions

8. Law and Order

9. Accountability of bureaucracy

All in all, political risk insurance should be considered when investing abroad, especially in markets that are uncertain. There are always ways to manage risk, and political risk insurance is just another form of risk management.  It should be carefully considered, especially in today’s rapidly changing world.


No comments yet.

Leave a comment

Your email address will not be published.