|
Financial Solutions
Political Risk Insurance
Political risks often constitute a very serious threat to overseas trade and investments. Organisations also need to take into account the extent of political risks in a particular territory when assessing their return on capital (risk adjusted returns) and cost of financing.
JLT Asia helps clients to place Political Risk Insurance (PRI), providing protection against non-commercial risks associated with selling goods or services across country borders or when investing in foreign territories.
PRI is often used as a means to increase sovereign debt exposures for banks and/or enable contracts to be formed by indemnifying the financier behind the trader or investor.
PRI is also used to reduce uncertainties associated with trading or investing in foreign markets, increasing the attraction of transactions by reducing the credit risks they pose to all parties involved.
Historically, there have been three main categories of political risk insurance:
Investment Insurance
The main investment risks against which investors are protected include uncompensated Confiscation, Expropriation, Nationalization or Deprivation (CEND) of fixed or mobile assets in foreign countries. Investment Insurance may be extended to protect against losses arising from:
- War or civil war
- Strikes, riots, civil commotion and terrorism - Political Violence (PV)
- Laws, regulations or restrictions by the government of a foreign country that specifically acts against foreign investments to the effect of halting activities
- Inconvertibility or exchange transfer restrictions that prevent the insured from converting and repatriating dividends and profits
- Seizure: protection is provided against a public body seizing goods; such goods are often used as payment for a barter or counter trade contract
- Business interruptions: loss of income arising from interruptions to business caused by Confiscation, Expropriation, Nationalisation or Deprivation (CEND) of fixed or mobile assets in foreign countries
- Risks to insured's assets
- Inability to repossess equipment leased to a government customer (public) and deprivation of collateral or other assets
The main pre-requisites for the application of Investment Insurance are that the insured needs to have an investment in an overseas territory that in some way may be adversely affected by political action taken by the government or another political organisation.
This area of PRI does inherently overlap with all other areas. Its greatest use today is to underwrite the risk for lenders involved in financing infrastructure projects in emerging markets on a limited recourse basis. In this respect, the most basic cover is typically referred to as the 'Three Point PRI' and includes CEND, War & PV and Inconvertibility. When additional risks are insured the cover is often described by lenders as "extended PRI".
Back to top
Contract Frustration
Contract Frustration is a generic term used to describe protection provided against losses arising from the actions of a political body that frustrate contracts. The contract may be a buy, supply or financing contract and the counterparty may be a public entity.
Where the counterparty/obligor is a public entity the commercial credit risk associated with the entity is considered to be a political risk by insurance markets. Under a PRI policy, the political aspects of the payment risk are insurable, when insurance is bought against political actions that frustrate a contract with a private buyer.
Many of the risks for which insurance is provided in this category can also be covered for trade contracts within an export credit insurance policy, alongside commercial credit risk insurance on private buyers.
The main risks against which insurance is provided are:
- Non-payment
Insurance is provided against the risk of a public buyer failing to pay. This may include non-honouring of letters of credit issued by state owned bank(s).
- Exchange Transfer
Insurance is provided against a political action that prevents or restricts conversion or transfer of currency as agreed.
- Export/Import restrictions
Insurance is provided against trade embargos or license cancellations that frustrate contracts.
- War
Insurance is provided against the risk of a contract being frustrated by war.
There are a number of other risks that can be insured when it concerns contracts with foreign countries. The main requirements for coverage are that the liabilities are clearly defined and the risk is one where an action is taken by a political body with the effect of frustrating the contract.
Back to top
Bond Indemnity
This category of political risk insurance is associated with circumstances where a company has to raise a bond to guarantee its performance under a contract in a foreign country.
Three types of bonds are covered:
- Tender or Bid Bond
Where the bond is raised by a company tendering to win a contract, to guarantee their ability to deliver against the tender they have submitted.
- Performance Bonds
Where the bond is raised by a company in favour of their customer once they have won a contract, to guarantee their ability to perform under the contract.
- Warranty Bonds
Where the bond is raised by a company in favour of their customer when they have completed a contract, to guarantee that the subject of the contract will perform as required.
The Bond Indemnity provides for:
- A government (public) buyer unfairly calling the bond.
- A buyer fairly calling the bond where the contracting company has not performed under the contract due to a political interference e.g. license cancellation by the insured or the buyer's government.
Bond Indemnity should not be confused with the ability of underwriters to actually issue performance bonds. Bond Indemnity is typically applied to performance bonds already issued by banks. For information concerning performance bonds issued by underwriters, please contact JLT.
Back to top
Back to Financial Solutions |
