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11/28 M97/February 2018 Reinsurance

Political risks can be covered under one of the following:

Comprehensive credit Policies underwritten in the trade credit market rather than the political risk market.
risk insurance
Cover is provided for a limited range of political risks, such as failure of the appropriate
exchange control authority to remit foreign exchange after the buyer has paid, but can also
be extended to include any action of the nature of a political risk which prevents payment,
such as nationalisation of the buyer’s business, and this would be reinsured on a trade
credit treaty.
Pure political risks Reinsured on a political risk treaty and insured in the political risks market among Lloyd’s
covers syndicates or with specialist company insurers; such policies can cover the political risks
mentioned above, but not the credit risk, and also expropriation of assets, non-payment of
dividends or interest, or non-repatriation of capital equipment sent out to be used in capital
projects, failure of the central bank to pay or permit payment under an irrevocable letter of
credit or other guarantee and several other types of risk of a similar kind.

Categories of political risks
Political risks can be categorised by focusing on two criteria:
Political risks can be
categorised by a. the person(s) or group(s) of persons committing the act, and
focusing on two
criteria b. the motivation of the act.
According to these criteria, five main categories of political risks arise, irrespective of the definition
problems mentioned above:

Category 1: War/civil war/warlike operations
a. Committing person(s): two or more states or different social/ethnical or religious groups.
b. Motivation: to secure/expand its power.
Terms describing this category of political risks are, e.g. ‘war (whether war be declared or not), warlike
operations, civil war, invasion, act of foreign enemy, hostilities’.
Category 2: Overthrow of the government (through military or popular rising)
a. Committing person(s): an organised political or military group, the civil population. Reference copy for CII Face to Face Training
b. Motivation: protest against/overthrow the government.
Terms describing this category of political risks are, e.g. military rising, mutiny, popular rising, civil
commotion assuming the proportions of or amounting to a popular rising, insurrection, rebellion,
revolution, military or usurped power, martial law or state of siege or any of the events or causes which
determine the proclamation or maintenance or martial law or state of siege.
Category 3: Orders issued by a governmental or military authority
a. Committing person(s): governmental or military authority.
b. Motivation: to intervene arbitrarily in the population’s property rights for political reasons.

Terms describing this category of political risks are, e.g. permanent or temporary dispossession resulting
from confiscation, commandeering or requisition by any lawfully constituted authority.
Category 4: Disturbances
a. Committing person(s): the civil population.
b. Motivation: to influence the government.
Terms describing this category of political risks are, e.g. riots, strikes or lockouts, riots attending a strike
or lockout, civil commotion, vandalism and malicious mischief.

Category 5: Terrorism
a. Committing person(s): acts of persons or groups of persons.
b. Motivation: to put the public in fear.
These groups of political risks differ in their vulnerability and therefore also their insurability.
Category 1 (war/civil war/warlike operations) shows in general the highest vulnerability due to the large
geographical area, interference of military groups and/or large parts of the population, duration etc.
while categories 2–4 have declining vulnerabilities.

The borderline especially between category 2 and 4 may be floating. An incident may start as local civil
commotion (category 4) and then escalate and become a popular rising (category 2). The categorisation
11 therefore also depends on the severity and the extent of the incident.
Chapter