What is political risk insurance?

Multinational enterprises and banks face a number of risks when conducting business overseas. Some of these risks can be removed or mitigated by conducting due diligence on the parties involved and on the economic viability of the proposed business. Other risks are harder for investors or lenders to predict. These include some commercial risks and, non-commercial - or political - risks. Political risk insurance (PRI) is a tool for businesses to mitigate and manage risks arising from the adverse actions - or inactions - of governments. As a risk mitigation tool, PRI helps provide a more stable environment for investments into developing countries, and to unlock better access to finance.

Using PRI

Whether planning to establish a direct investment abroad or as exporters, multinational enterprises use PRI to enhance their confidence in markets perceived to be riskier than home markets. PRI allows investors to concentrate on the commercial aspects of investments, with the comfort that someone else - PRI providers - will help them avoid potential losses, or reimburse them in case of a covered loss related to political causes.

Even when investors are comfortable investing in emerging markets or frontier economies, they frequently face constraints from lenders. Lenders often must provision for country risk, and PRI may, in certain cases, reduce the provisioning requirement, and generally gives comfort to lenders. This can improve access to financing, including the amounts, interest, and tenor of loans.

Who provides PRI?

The political risk insurance industry helps multinational enterprises and lenders mitigate risk through insurance against adverse government actions or war, civil strife, and terrorism. Private PRI providers, which are profit-oriented, offer coverage for developing and developed countries and for varying tenors. Most public providers are national export credit agencies (ECAs), which may cover both export credit/trade transactions, as well as longer-term investments. ECAs usually support investors and lenders from their home country going into developing countries, and may also have mandates to support development and be self-sustaining. Finally, several multilateral agencies also provide PRI, these providers often have special programs for SME investors, companies and banks from developing countries, etc.

Coverages, pricing, tenor, and eligibility vary widely - by PRI provider, host country (destination of the investment), and sector or type of investment. Investors and lenders are strongly encouraged to contact various providers to find the coverage most suited to them. Below are links to a directory of PRI providers, intermediaries and consultants.