What is the need of Political Risk Insurance?
Among the many business insurance types available the one known as “Political Risk Insurance” (or in short, PRI) is the least known among businessmen, although this insurance-type becomes more and more popular today. This is a policy that may be purchased against such risks as revolution, terrorist attacks, or changes in political conditions that result in a loss related to the insured’s business.
Moreover, this insurance-type also covers the overseas assets of the insured, for instance, the equipment or the manufacturing apparatus. With the growth of international businesses and relations, political risk becomes one of the most important factors that may endanger a multinational corporation and the international business in general.
For those businessmen who are interested in this insurance-type, it is essential to know that Political Risk Insurance refers to various risk-types, such as:
- Inconvertibility referring to the foreign currency
- Inability regarding the repatriation of funds
- Political violence (typical examples are terrorism, revolution, rebellion, civil rioting, or war)
- Governmental appropriation
- Governmental seizure of assets
- Governmental denial of important contracts, or contravention of contracts
What are the costs of such political risk insurance?
Premiums vary from country to country as well as according to the industry, the content of the chosen contract-type, as well as the risks involved. Therefore it is of primary importance to define and know exactly what the contract’s terms and conditions are. Based on this information, it becomes obvious what the exact scope of the policy is. Although there are policies that provide protection for specific situations, the majority of political risk insurance providers have standard contracts.
Generally speaking, Political Risk Insurance covers 90% of the losses. For instance, if a foreign government is unable to make certain scheduled payments, the owner of political risk insurance will get 90% of the required amount of money. Similarly, if a foreign government takes a series of actions to confiscate the assets or the investments of the insured, then political risk insurance provides the needed coverage. Also, certain forms of political violence may force businessmen to shut down their overseas operations. This is also a typical case when political insurance will help.
Talking about eligibility, one needs to know the following. In order to be eligible for this insurance-type, one’s business needs to generate economic benefits to the host-country. This fact must be demonstrated somehow, for instance, by proving that the business helps in job-creation, or it contributes to the growth of the country’s GDP. Besides qualifying, businessmen who intend to purchase this insurance also need to be aware of the major principles governing international business in general, and in particular, the protection of international trade.
Finally, there are some general rules business-owners need to take care of in order to manage the risks their companies may face. First of all, they need to study attentively the different policy-types. This way they become well-informed and it will be easier for insurance professionals to help them by finding the appropriate insurance. Analyzing one’s business is an essential step as well, which can help a lot in choosing the right coverage. This step also requires moving forward a little, namely, thinking about the possible future performance of the firm as this might influence the decision regarding the insurance. Third, finding an insurance professional will help businessmen a lot, as these people are ready to implement an appropriate insurance-scheme that is aligned with one’s business-plan. After having made the right choice concerning the insurance-type, one needs to review this insurance-plan on a regular basis as business is generally characterised by change which could affect the needed insurance as well.
All in all, as political risk may affect an international business in a large proportion, companies operating overseas and multinational companies in particular, are recommended to take such insurance into consideration. Political risk insurance provides a comprehensive protection, thus giving the needed piece of mind to businessmen who can concentrate on the growth of their business instead of worrying about the safety and the operability of their business.