Companies that enter into trade contracts for the supply of goods and services with government or private entities in emerging countries are often exposed to a number of underlying political risks.

Most governments seek to promote the free trade of goods and services. However, despite clear rules set out by the World Trade Organisation (WTO), some governments continue to act – or threaten to act - to revise or introduce legislation that prevents or restricts the international trade of goods and services. Such actions usually occur unilaterally but will sometimes take place under the guise of sponsorship of the United Nations or humanitarian organisations.

Poor economic management of a country’s finances can also lead to payment default by government entities or the restriction of hard currency payments to overseas companies. Trade embargoes and sanctions are also a recurring issue in some countries where the government attempts to enforce foreign policy objectives or influence domestic public opinion.

Additionally, political violence remains prevalent in many parts of the world where political instability persists.

In such environments, companies may find that contracts for the supply of goods or services are exposed to these unforseen political risks.

A contract can be repudiated or frustrated for a range of political reasons beyond the exporter’s (or importer’s) control, leading to financial loss. This can occur before or after the delivery of goods.

What Marsh can do

Although unpredictable, the risk of loss caused by political action can be insured in many circumstances.

The Political Risk specialists at Marsh have extensive experience in working with companies to comprehensively identify the political risks associated with their global business operations. The team possesses years of working knowledge in designing and implementing tailored risk management solutions to suit the specific needs of their clients. Some of the areas of insurable risks include:

• Unilateral termination of the contract by the buyer, where the buyer is a government entity, contrary to the contract terms and conditions.
• Cancellation or non-renewal of previously valid import or export licenses issued by the specified government
• Imposition of any law or other specific government action or order which prevents the import or export of goods
• Frustration, and thus termination of the contract due to war or civil war which prevents performance of the contract

Contract Frustration Insurance can provide indemnity to the exporter for 90-95% of its loss before shipment, which generally includes:

• Direct costs incurred before the contract is terminated
• Contractual penalties paid to suppliers in order to terminate subcontracts
• An allowance (typically up to 10% of contract value) for loss of net profit, or loss of contractually due amounts (that include profit)

Indemnity of up to 95-100% of invoice amounts can be provided for:

• Failure or refusal of the buyer to pay sums due, where the buyer is a government entity or bank
• Failure of a government buyer or bank to honour an arbitration award in favour of the exporter, as made
• in accordance with the dispute resolution terms of the contract
• Failure of the appropriate government foreign exchange authority to transfer the currency specified in the contract to the exporter once a private buyer has deposited the equivalent local currency with the authority
• Licence cancellation/non–renewal

Structuring the right cover

Contracts can be covered for terms of up to three to five years or, if a buyer holds sovereign status, up to 10 years. Premium rates are fixed for the term of the insurance and, unless otherwise agreed, the policy is non-cancellable so insurers cannot remove cover if the political circumstances in a country changes. The insurance responds after a ‘waiting period’ which allows ‘normal’ collection efforts to occur.

Most commercial political risk policies are confidential and, therefore, their existence cannot be disclosed to third parties, including specifically, the government of a foreign country. They are provided on a non-admitted basis so that true ‘risk transfer’ from the (foreign) risk country can be achieved