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Read MoreImagine this—the President of a country in which you do substantial business decides you are a threat to national security. He signs an executive order to shut down your business in 40 days. Now what?
Political risk is commonly considered a risk of doing business in developing countries or emerging markets, but it can happen anywhere—even in the United States, as the popular social media app TikTok recently discovered.
Political risk is a company’s exposure to the risk of a political event that would diminish the value of the company’s investment or loan. Major insurable political risks include:
Political risk can sometimes be conflated with economic risk. Economic risk, however, is the chance that macroeconomic conditions such as exchange rates or inflation—not political events—will affect a foreign investment.
According to experts, current potential political risks are varied and include:
A 2019 study—performed by Willis Towers Watson (WTW)—of 41 large major corporations with extensive international operations found that political risk losses were reported from 37 countries. 68% of survey respondents had experienced a political risk loss. 61% believed that political risk had increased since 2018. And 75% had experienced expropriation losses in excess of $250 million.
Expropriation losses were the most catastrophic. Other political risks were more frequent, but smaller, such as sanctions against countries such as Venezuela, Russia, and Iran.
Political Risk Insurance
While 71% of respondents believed political risk was on the increase, fewer than half relied on political risk insurance. Political risk insurance is sometimes perceived as being insufficiently broad, although new and broader types of coverage are evolving rapidly in response to demand.
The WTW study also found that companies that have actually experienced a political risk loss are more likely to have coverage and are more likely to reduce their international presence. Buyers of political risk insurance (PRI) are typically multinational corporations, importers and exporters, project enders, financial institutions, capital markets (the highest users of PRI), foreign investors, and construction and engineering contractors. The countries that are currently most commonly avoided due to perceived political risk include Iran, Venezuela, Libya, Argentina, Russia, and Egypt.
Political risk insurers can be private (e.g., Lloyds of London) or public. Public insurers are state-backed investment guarantee firms that support government foreign policy and international development goals. They can offer longer, larger, and riskier policies than private insurers.
Companies frequently assess political risk by using a risk premium—that is, they increase the required rate of return for a project by adding a “risk premium” or quantification of the extra return required on the project to mitigate the perceived risk of operating in the country. Some companies, however, consider this approach as too financial and narrow and attempt to assess risk by using a more holistic, qualitative approach.
Before making a political risk claim, insureds should consider the following:
While global stability is always desirable, it is increasingly elusive, warranting that prudent global companies seek additional security for their foreign investments. Political risk insurance can add stability to a company’s international portfolio.
We would like to thank Nora Ostrofe for providing insight and expertise that greatly assisted this research.
Nora Ostrofe is a Vice President in J.S. Held’s Economic Damages & Valuations Practice. She joined J.S. Held in 2019 with the acquisition of HSNO (Hagen, Streiff, Newton & Oshiro, Accountants, P.C.) She has served as a forensic economist for over twenty years and has extensive experience valuing claims of economic loss in a variety of litigation practice areas, including (but not limited to): business valuation; class action (employment, product liability); employment (wage and hour, wrongful termination); marital dissolution; medical malpractice; personal injury; and wrongful death.
Nora can be reached at [email protected] or +1 510 740 0376.
1. International Institute for Strategic Studies (IISS). The global coronavirus crisis – an uneven recovery and rising political risk. (2020). Retrieved from https://www.iiss.org/blogs/analysis/2020/04/gstrat-coronavirus-crisis-and-rising-political-risk
2. Time. Top Geopolitical Risks in 2020: Coronavirus Update. (2020). Retrieved from https://time.com/5807597/top-geopolitical-risks-in-2020-coronavirus-update/
3. Oxford Analytica. How Are Leading Companies Managing Today’s Political Risks? 2019 Survey and Report. (2019). Retrieved from https://www.willistowerswatson.com/-/media/WTW/Insights/2019/12/2019-11-WTW-political-risk.pdf
4. Niche Trade Credit. Our Tips For Filing Political Risk Insurance Claims. (2019). Retrieved from https://www.nichetc.com.au/our-tips-for-filing-political-risk-insurance-claims/
5. PropertyCasualty360. Political risk insurance coverage: Options and opportunities. (April 8, 2019). Retrieved from: https://www.propertycasualty360.com/2019/04/08/political-risk-coverage-options-and-opportunities-414-152701/?slreturn=20200802190834
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