Page 21 - Insurance Times November 2019

in search of lower costs, new opportunities and access to prise, provides this insurance in India. Any company invest-
resources. When they arrive, however, they often find that ing outside India can buy a risk cover from ECGC or the
the policies of foreign environments add risk and complex- Multilateral Investment Guarantee Agency, a member of
ity to their business performance. The question for all such World Bank Group. ECGC bears 85% of the loss, which is
companies operating internationally thus becomes how part of a comprehensive cover. ECGC, however, cannot
best to manage political risk. Not only political changes pose provide cover to overseas companies investing in India as
direct risks to such firms, but politics is also a component it cannot cover sovereign risk, which is generally bought
of other external risks. Moreover, political risk is often per- through a broker. The premium varies from country to
ceived to be outside of management's control, making it country. Underwriting of political risk insurance is a dy-
difficult to define or predict. namic process and depends on the situation in that particu-
lar country. The size of a political risk insurance policy is
North-based Industries in the global market are in the opin- generally equal to the investment made by the company
ion that the Southern Hemisphere is not conducive for in- abroad.
vestment. The reason is involvement of risks such as local-
ized-small intensity conflicts, political violence such as civil Political Risk Insurance can be specially tailored to cover
unrest, revolution, uprising, terrorism, insurgency and sec- many different risks but can be boiled down to two basic
tarian violence, which are mushrooming mostly in Asia, aspects. Firstly, it protects an insured in case a foreign en-
Africa and Latin America. This fragile-unstable governance tity confiscates its goods or equipments, and secondly, it
situation creates hurdle in the process of 'business as usual' protects an insured in case a foreign government refuses
for the mandarins of market economy and globalizations. to pay a contract or interferes with the fulfillment of a con-
To avoid the loss of investment, the private companies seek tract.
pre-cautionary approaches in terms of commercial and
political risk insurance and export credit guarantee. PRI protects foreign investments against:-

1. Forced Abandonment: It is like complete abandon-
Political Risk Insurance Policy: ment of a foreign investment as a direct consequence
The forced exit of GMR Infrastructure from Maldives ear- of political violence or permanent divestiture of the
lier has caused a huge loss to the Indian company. But GMR, insured's investment at the direction of the insured's
which has claimed a compensation of $800 million from the government. For example we may consider the Enron's
Maldives government, could have easily cut its losses had Dabhol project in Maharashtra a $3 billion, 10-year liq-
it purchased a political risk cover. uefied natural gas power plant development project
that began in 1992, the single largest FDI in India's his-
It is an insurance policy bought by companies to cover tory. But there arose endless disputes over the prices
losses arising out of adverse political developments in for- and terms of the deal along with mounting protests
eign countries where they have their projects or businesses. from India's public created many stumbling blocks. By
Such policies cover losses caused by political violence, such mid-1995, under new political direction, a letter to
as revolutions, civil unrest, terrorism or war; confiscation Dabhol Power Co. called for a cessation of construction
of assets by governments abroad; wrongful calling of let- and abandoning the project because the cost for build-
ters of credit; and business interruption. Such policies have ing the plant and generating the electricity was too
a standard risk coverage format, though they can be modi- high. So Enron & its U.S. partners, Bechtel and GE, have
fied to suit the requirements of the client. filled claims with OPIC, the political risk insurer agency
of the U.S. Government, to collect $200 million in com-
A decision to buy such covers depends upon a company's
pensation for the losses suffered in that Dabhol Project.
own assessment of risk, its concerns about political risks
associated with its specific investments abroad. Sometimes, 2. Confiscation, Expropriation, Nationalization, Depriva-
banks drive the purchase of political risk covers. Many tion - These risks may result in partial or total loss of
banks do not lend to projects without this insurance, either investments or assets. Examples of outright expropria-
because of their own internal risk management concerns tion include the nationalization of entities owing debts
or because they have reached their lending limits for a to foreigners or having outstanding contractual rela-
given country. tions with them, the direct annulment of debts or
claims, measures denying the foreign owner access to
Export Credit Guarantee Corporation, a government enter- its funds and profits. In recent years we have seen a

The Insurance Times, November 2019 21