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What is Political Risk Insurance?

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  • Written By: wiseGEEK Writer
  • Edited By: O. Wallace
  • Last Modified Date: 18 March 2018
  • Copyright Protected:
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    Conjecture Corporation
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Though the globalization of many businesses often results in profits, sometimes when a business begins to have a presence in other countries, it may suffer losses too. These losses aren’t always due to poor management of the company, but instead may be due to a changing political atmosphere within a country that might result in direct violent attacks on the company, changes in the way the country handles currency or taxes, or changes in power that void any contracts the company may hold. One way of minimizing potential shortfalls due to changes in another country’s politics is through political risk insurance (PRI).

Various insurance companies offer businesses the opportunities to purchase political risk insurance for different term lengths, often about 10 years. This can help a company feel safer jumping into the global market. PRI may insure in two directions that are either specific to business or to the way the business is affected by widescale changes in a country. A business that is subject to an attack by a terrorist has experienced a firm-specific risk, but those changes at the country level, like a government coup or a grapple for power at the top that changes rights of ownership for all would be country specific. Depending on specific plans PRI may insure for both eventualities.

More examples of things political risk insurance might address include:

  • Changes in currency.
  • Nationalization of all property.
  • Nullification of previous treaties and agreements through changes in mind or changes in government.
  • Failure to honor business agreements or reneging on them.
  • Losses due to war or terrorism.

Since there are many insurance agencies that serve corporate entities, specifics of coverage need to be defined by each policy. There may be considerable variance, and also, there are definitely changes in what a policy would cost. Part of this is dependent on the type of country in which a company does business. Extremely stable governments that offer well defined treaties or terms with companies may not be very expensive when it comes to buying political insurance, and there may be some companies that wouldn’t buy this insurance for business transacted in certain parts of the world. A US company probably wouldn't carry political risk insurance for business with Canada or the UK, or if they did they could get it very inexpensively.

Other countries that are more likely to be unstable increase political risk insurance premiums. Each insurer may assess these slightly differently, but they can show charts or other information that demonstrates the way risk is calculated. When a company wants to do business in highly unstable countries, premiums are likely to be higher.

Some benefit clearly may exist in getting political risk insurance especially when companies want to develop in countries that have a significant amount of instability. A company could do much to improve quality of life, which might lead to less unrest, though this is a best-case scenario. While a company’s presence in another part of the world certainly doesn’t always guarantee calming of instability, it might create improvements. Companies may feel less concerned about profit losses entering these countries if they have political risk insurance.

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