Political Risk Insurance in a Nutshell
March 25, 2009, By Loral A. Narayanan
The following article originally appeared in the March 2009 issue of ABC-Amega's free client newsleter, "Credit-to-Cash Advisor". What is Political Risk Insurance? Political risk insurance (PRI) is a tool businesses can use to mitigate and manage risks arising from the actions of governments. It helps provide a more stable environment for investments into developing countries, and creates better access to finance. PRI is available for different types of political risks, some of which include:
- Political violence, such as revolution, civil unrest, terrorism or war
- Governmental expropriation or confiscation of assets
- Governmental repudiation of contracts
- Inconvertibility of foreign currency or the inability to repatriate funds
- Unfair discrimination of foreign competitors, in terms of higher taxes or import duties, etc.
History of Political Risk Insurance
The first extension of insurance to cover political risk is ascribed to the U.S. government. Shortly after the end of World War II in Europe, the U.S. offered a type of political risk insurance to quell concerns arising out of the spread of communism, which made it possible for governments to acquire assets on behalf of the state with no compensation to the investors. There also remained some fear that another world war could break out any time. In this climate, U.S. investors were skeptical about investing in the European Recovery Program (Marshall Plan) to rebuild the devastation caused by the war in Europe without some assurance that they would be protected.In the 1960s, the Agency for International Development (USAID) began administering the U.S. investment guarantee program, directing it specifically toward developing countries. In 1969, an amendment to the Foreign Assistance Act established OPIC (Overseas Private Investment Corporation) as an independent agency within the U.S. government. OPIC's primary purpose was encouraging U.S. overseas investment in developing countries through issuance of political risk insurance and project finance. Political risk insurance provided by the governmental agencies covered: (1) currency inconvertibility; (2) expropriation; and (3) war and political violence. In the 1970s, the private political risk market was established by several underwriting syndicates at Lloyd's of London and the American International Group (AIG). The private sector expanded export risk coverage to include coverage for non-payment and various forms of breach of contract. (Such coverage is now available through the government agencies as well.) Growth of the Private Political Risk Market
With the proliferation of Free Trade Agreements and the necessity to lower costs in order to stay competitive, an increasing number of small and medium sized enterprises have entered the international marketplace - some to establish offshore manufacturing and distribution services; some to create international bases to access rapidly developing foreign markets. This has created the opportunity for extensive growth of the private political risk market. Countries providing the most appeal, in terms of significantly lower costs and increasingly expanding markets, have generally been emerging economies. These are countries still developing commercial regulations, legal systems, and regulatory transparency. Small and medium enterprises found themselves at a disadvantage in comparison with large organizations, not having the resources to take on either the typical commercial risks or the political risks some of these developing economies present. PRI has made it possible for these smaller companies to expand into the global economy. Where can you purchase political risk insurance?
Most countries have national agencies that provide their domestic companies with political risk insurance. In the United States, both the Overseas Private Investment Corporation (OPIC) and the Export-Import Bank provide commercial and political risk coverages for American exporters. Other providers include multilateral agencies like the World Bank or similar region-based banks and private companies. The Berne Union
The Berne Union, officially, the International Union of Credit & Investment Insurers, is the leading multi-national organization for the export credit and investment insurance industry. It currently consists of 50 public and private members, who support exports and investments into highly developed as well as emerging markets by providing insurance or guarantees to protect exporting companies, investors, and banks against political and commercial risks. The Political Risk Insurance Center (www.pri-center.com)
PRI-Center is an information portal providing free access to online political risk management and insurance resources. It was established in 2006 by the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, to promote foreign direct investment to developing countries. Along with many searchable, documents, events and news items, PRI-Center provides directories of political risk insurance providers, and Country Analyses on about 160 countries. The Bottom Line
Whether planning to establish a direct investment abroad or export to a new, foreign market, companies should consider political risk insurance to enhance their confidence in markets perceived to carry related risk. PRI allows companies and investors to concentrate on the commercial aspects of their investments, knowing that the insurance will help them avoid losses resulting from political causes should they occur. ***** The above information was provided by ABC-Amega Inc. and was originally published in their client newsletter "Credit-to-Cash Advisor". They provide 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com.
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