The complexity of the political situation in host nations must be taken into account by all stakeholders in a project or investment. Political risks resulting from acts of government can include:
- Discrimination (whether by regulatory, legislative or judicial authorities) against foreign owned businesses which is in contravention to the investors rights under either the laws of the host country or international law
- Seizure of equipment or assets by a government – either outright or step-by-step
- Failure of a government entity to pay contractually due amounts
- Contract frustration
- Inability to repatriate funds due to the limited means of converting earnings into foreign currencies
- Restrictions by local authorities on the transfer of foreign currencies abroad
- Prohibitive tax increases aimed at foreign-owned businesses
Many of these risks can be insured against by using a political risk insurance policy. Marsh’s Political Risk specialists work with companies to evaluate the risks associated with their global business operations and to design and implement tailored political risk management solutions to suit their specific needs.
Political risk insurance
Political risk insurance can help companies to manage the risks associated with operating in developing countries. It is designed to protect a company from financial losses that can result from government actions or political unrest overseas. This type of policy can provide protection from losses including:
- Equity invested in a subsidiary or joint venture
- Loans made to the subsidiary from the parent company
- Loans from financial institutions that are guaranteed by the parent company
- Inventory and receivables, mobile plant and equipment used by contractors
- Other financial commitments or exposures such as performance, retention or advance payment bonds
- Future profits
Any one of these losses could have a material impact on the results of the parent company, as well as the associated loss of shareholder value. Political risk insurance can also be provided to protect lenders to an international project or company against financial default resulting from such losses. Effective integration of political risk insurance in project finance transactions can deliver improved risk and financial outcomes to both project sponsors and lenders.