Demand Grows for Political Risk Coverage: Seeking International Protection

By Pelland, Dave | Risk Management, August 1997 | Go to article overview

Demand Grows for Political Risk Coverage: Seeking International Protection


Pelland, Dave, Risk Management


Seeking International Protection

As more middle market companies establish international operations or participate in joint ventures, there is growin concern about the potential problems that can arise. The challenges of managing a business venture thousands of miles (and several time zones) away can be compounded by potential political instability within the host country. As a result, more companies exploring international investments are adding political risk insurance to the list of items they won't leave home without.

"There is a lot of interest in political risk insurance from middle market customers," says Patricia Skold, a staff consultant at Chubb a Son Inc. in Warren, New Jersey. "International markets are new to most companies, and many lack experience operating in different markets. As companies invest internationally, they face certain risks that they're not familiar with, and more are looking at political risk insurance to improve their financial comfort levels."

Some of the exposures that can derail an international project include expropriation or nationalization of the project's assets by the host country; deprivation (when investors are prohibited from exporting products or equipment); forced abandonment of a project by the host government; forced divestiture of assets (either by the host country or by the investors' home nation); and selective discrimination (when a project is affected by international trade restrictions). In addition, property coverage is available for damage caused during civil wars or insurrections.

Even nations that appear receptive to international investment carry a degree of political risk, Ms. Skold says. For example, she points to proposed laws in Indonesia and Zimbabwe that would allow the government to take over international projects without notice. More generally, Ms. Skold adds that a government that welcomes a project with open arms one day may not hold power the next. "A new government can easily change existing laws," she says.

As companies become more aware of these exposures, political risk is playing a larger role in the planning process of international projects-especially among mid-sized firms without the financial ability to absorb losses that larger firms may be more willing to retain.

"A lot of the interest in political risk insurance is coming from middle market clients," Ms. Skold says. "More companies are recognizing the need for this coverage and asking what their underwriters can do. Part of the interest comes from the fact that this is a new area for many companies, and part of it comes from changes in many operating environments outside of the United States. …

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