Academic journal article Duke Journal of Comparative & International Law

A Comparative Analysis of Public and Private Political Risk Insurance Policies with Strategic Applications for Risk Mitigation

Academic journal article Duke Journal of Comparative & International Law

A Comparative Analysis of Public and Private Political Risk Insurance Policies with Strategic Applications for Risk Mitigation

Article excerpt

INTRODUCTION I. A PRIMER ON POLITICAL RISK INSURANCE    A. The role of PRI for foreign investors    B. Public PRI    C. Private PRI II. A COMPARATIVE ANALYSIS OF PUBLIC AND PRIVATE POLITICAL RISK INSURANCE POLICIES    A. The advantages and disadvantages of public PRI    B. The advantages and disadvantages of private PRI III. TOWARD A COST-EFFECTIVE RISK MITIGATION STRATEGY FOR INVESTORS    A. Purchasing public insurance is favorable to private insurance    B. Lowering insurance premiums through strategic engagement with      host communities and host governments CONCLUSION 

INTRODUCTION

Any business with global operations is bound to have considered the purchase of a political risk insurance (PRI) policy. A PRI policy insures a beneficiary's property in the country specified in the policy against three primary risks--expropriation, currency inconvertibility, and political violence (1)--providing enormous value to the beneficiary. A beneficiary can insure almost anything, tangible (e.g. production facilities) or intangible (e.g. future cash flows), if it understands the availability and variety of public and private PRI options. And it's not only global business powerhouses that participate in the PRI market. An ever-increasing number of small and medium sized businesses are quickly seeing the value of PRI policies to their global operations.

Take, for example, the American International School of Bamako, Mali. On March 24, 2012, the BBC News reported that a group of mutinous soldiers were "in complete control" of Mali's government after having overthrown the country's elected leader. (2) With the whereabouts of the elected president unknown, Bamako, the capital of Mali, descended into a scene of widespread pillaging, looting, and vandalism. (3) But the American International School of Bamako did not need to see news reports to grasp the magnitude of the coup. The school had a total of 206 students enrolled on March 20, 2012, but the number of students actually attending class dwindled to 117 by April 2. (4) Two days later, on April 4, there were just 88 students present. (5) Unable to operate, the school closed its doors, evacuated its teachers and their families, and decided to try to re-open in August for the new academic year. (6) When the school re-opened its doors in August of 2012, only 95 students enrolled. (7) As a result of the military coup, the American International School lost over $1.5 million in tuition income, (8) and incurred over $26,000 in evacuation expenses. (9)

Fortunately, the American International School had insured its investment with political risk insurance through the Overseas Private Investment Corporation (OPIC). Knowing that doing business in Mali contained inherent political risks that could jeopardize the business, the school had purchased PRI covering losses of business income up to $2 million as well as evacuation expenses caused by political violence. (10) Under this policy, the school recovered over $1.3 million from OPIC for its loss of business income and evacuation expenses, (11) demonstrating the prudence of purchasing a PRI policy in regions with elevated levels of instability.

Unsurprisingly, then, the importance of PRI policies--like those purchased by the American International School--is rising among foreign investors. The number of policies issued increased by 13% in 2011, hitting a record number, with more records forecast in the coming years. (12) The use of PRI among investors, however, still has plenty of room to grow; only 18% of firms use PRI as a risk mitigation tool. (13) This also implies that any analysis of the use of PRI in mitigating risk must also consider its compatibility with other tools for managing risk. (14) Additionally, the growth in PRI policy issuance has been outpacing the growth of foreign direct investment (FDI), indicating that the importance of PRI is only likely to grow. (15) And as the American International School's experience demonstrates, PRI is not only for gigantic corporations but also for relatively small investors as well. …

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