Page 22 - Insurance Times November 2019

number of cases that have involved the issue of expro- political risk insurance, insurers will most likely consider a
priation. number of factors regarding the prospective client. The
3. Import or export restriction as & when being imposed insurer may want to know whether the prospective client
has experience selling to the specific country and whether
on trade.
the client has leverage in that country to help resolve any
4. Breach of Government Undertaking - The largest po-
problems. But the most important factor is the client's spe-
litical risk insurance claims in history were made in the
cific past loss history in this field.
wake of the financial crisis that struck Argentina in
2002 as national and state governments broke con- Insurers treat political risk as a country-specific phenom-
tracts and restricted the capital transactions of foreign enon. But individual companies confront different sources
firms.
of policy uncertainty and political influence depending on
5. Political Violence - Basically these are the politically factors such as their size, nationality, familiarity with the
motivated acts of violence, including war and civil war, local environment, partner status, technological leadership
which result in physical damage to property. and network of global stakeholders.
6. Currency Inconvertibility or Non-Transfer - It is aris-
ing out of Government controls that prevent the pur- Political risk insurance provides cover to an insured for risks
chase or transfer of hard currency for dividend pay- such as expropriation by a foreign State or currency risk.
ments, loan repayment or other remittances. But in recent years, attention has become more focused on
other, more direct, rights under international investment
7. Business Interruption - This may be due to loss of pro- treaties, which may be available to investors against politi-
jected net profit resulting from an act of confiscation cal interference. Where there is a treaty in place, the rights
or political violence.
available under it may be wider, more effective and, since
no premium is payable, cheaper than political risk insur-
Political Risk Insurance protects the Contracts ance. The scope of the protections is very wide and over-
against the risk of: lapping.
1. Non-payment by buyers;
Since the definition of investor is also pretty wide, these
2. Unfair calling of 'On demand bid' or contract bonds;
protections can often be wielded to good effect. It is only
3. Non-honouring of Letters of Credit; in the last ten years or so, that bilateral treaties have been
4. Import or Export restrictions; put to any significant use. It is a fast developing area of
international law and practice as investors begin to realize
5. Non-delivery of pre-paid goods;
the full extent of the potential protection. In certain fields,
6. War, Civil War, civil strife, rebellion, revolution, insur- it is beginning to lead to forum shopping where potential
rection, military or usurped power or destruction by or investors seek to channel their investment through entities
under the order of the insured's government (which in countries, which benefit from the treaty rights.
are always appearing as exclusion of all general insur-
ance policies under the heading 'War & warlike perils'); One of the most vaunted aspects of such treaty rights is
that arbitrations are often administered via the Interna-
7. Currency Inconvertibility;
tional Centre for Settlement of Investment Disputes, an
8. Contract Repudiation by buyers. autonomous organization within the World Bank Group in
Washington. No treaty claim has ever remained outstand-
As with any insurance, the precise scope of coverage is ing. So, treaty protection can be more comprehensive and
governed by the terms of the insurance policy. Perils cov- effective than political risk insurance cover. Treaties can also
erage, pricing, tenor, terms & conditions and eligibility vary give an investor a very long period of 'cover' beyond that
widely - by Political Risk Insurance provider, depending on available in the commercial political risk insurance market
the host country (i.e. destination of the investment), and since treaties often contain very long sunset clauses of up
sector or type of the investment. to 20 years. There are such powerful rights under treaty
available for free, but still, companies bother with political
Political risk policies may offer insurance for transactions risk insurance.
with terms of up to 10-15 years rather than the normal one
year in case of other policies. Before agreeing to provide This question is especially acute since political risk insurers

22 The Insurance Times, November 2019