Insurance Markets for Political Risk

Political risk insurance (PRI) transfers the financial consequences of government actions from investors to insurers. The global PRI market provides approximately $200 billion in capacity annually, covering risks from expropriation to currency inconvertibility across emerging and frontier markets (Berne Union, 2023). For investors with cross-border exposure, understanding PRI coverage types, pricing dynamics, and claims requirements helps evaluate whether and how to transfer political risks that portfolio diversification cannot eliminate.

PRI Market Overview

Political risk insurance emerged from government export credit agencies (ECAs) supporting post-war reconstruction. Today's market includes public, multilateral, and private insurers:

Public and Multilateral Providers

MIGA (Multilateral Investment Guarantee Agency): World Bank affiliate providing PRI for investments in developing countries. Outstanding guarantees of approximately $25 billion across 115 countries (MIGA, 2024).

OPIC/DFC (U.S. International Development Finance Corporation): U.S. government agency providing PRI, loans, and equity for development projects. Replaced OPIC in 2019 with expanded $60 billion portfolio authority.

Export credit agencies: Most major economies operate ECAs providing PRI for outbound investment. Examples include UKEF (UK), Euler Hermes (Germany), COFACE (France), and NEXI (Japan).

Regional development banks: African Development Bank, Asian Development Bank, and Inter-American Development Bank offer PRI programs for their regions.

Private Market

Private PRI insurers include Lloyd's syndicates and specialty insurers. Major private market participants:

• AIG, Chubb, Zurich, Liberty
• Lloyd's syndicates (Hiscox, Beazley, Ascot)
• Specialized political risk MGAs

Private market provides approximately $100+ billion in annual capacity, with individual policy limits typically ranging from $25 million to $500 million per project.

Market Capacity Distribution

Coverage Types and Definitions

PRI policies cover specific political perils, with definitions and exclusions that determine claims eligibility:

Core Coverage Types

Coverage Details

Expropriation coverage includes:

• Direct expropriation: Government formally seizes or nationalizes assets
• Creeping expropriation: Gradual regulatory actions that effectively deprive owner of asset value
• Forced divestiture: Government requires sale of investment to specified parties

Currency inconvertibility coverage includes:

• Active blockage: Government prevents conversion through exchange controls
• Passive blockage: Central bank queuing or administrative delays beyond defined waiting period (typically 60-90 days)

Political violence coverage typically includes:

• War and civil war
• Terrorism and sabotage
• Insurrection and coup d'etat
• Civil commotion with physical damage

Coverage Limits and Structure

Insured amount: Typically the lesser of book value or fair market value of the investment at time of loss. May include equity plus shareholder loans.

Waiting periods: Most perils require a waiting period before claims can be filed. Currency inconvertibility typically 60-90 days; expropriation may require 1-2 years to confirm irreversibility.

Policy period: Usually 1-3 years with renewal options. Long-term projects may secure 10-15 year coverage with private or multilateral insurers.

Pricing Factors

PRI premiums vary significantly based on risk characteristics:

Country Risk Assessment

Insurers assess sovereign risk using:

Rating agency assessments: Moody's, S&P, and Fitch sovereign ratings correlate with political risk premiums. Investment grade countries typically price at 0.3-0.8% of coverage; sub-investment grade at 1.5-4.0%+.

Country risk indices: Political Risk Services (PRS), Economist Intelligence Unit (EIU), and Marsh Political Risk Maps provide quantitative assessments.

Insurer experience: Historical claims experience in a country affects capacity and pricing. Countries with recent claims (Argentina, Venezuela) face reduced capacity and elevated premiums.

Investment Characteristics

Pricing Example

Scenario: U.S. investor seeks expropriation and currency inconvertibility coverage for $50 million equity investment in Brazilian manufacturing facility.

Key factors:

• Brazil sovereign rating: BB (S&P, December 2024)
• Sector: Manufacturing (moderate government interest)
• Tenor: 5-year coverage
• Structure: Direct investment, no project finance

Indicative premium range: 0.8-1.2% of coverage per annum, or $400,000-$600,000 annually for $50 million coverage.

Total 5-year cost: Approximately $2-3 million or 4-6% of insured investment value.

The point is: PRI costs are meaningful but manageable for investments where the risk justifies the expense. A 5% premium over investment life provides protection against tail risk scenarios with potentially 100% loss.

Claims Process

Understanding claims requirements helps set realistic expectations and ensure recoverable losses:

Pre-Loss Requirements

Notice provisions: Policies require prompt notice of circumstances that may give rise to a claim. Late notice can void coverage.

Mitigation obligations: Insureds must take reasonable steps to prevent or minimize losses. Abandoning assets prematurely may void coverage.

Compliance with law: Investments must comply with applicable laws. Illegal investments are typically excluded.

Premium payment: Coverage lapses if premiums are not paid on schedule.

Claims Filing

Waiting periods: Most claims cannot be filed until waiting period expires, confirming event persistence.

Documentation requirements:

• Evidence of ownership and insured investment amount
• Evidence of covered event (government decree, exchange control notice, damage assessment)
• Evidence of loss amount (financial statements, valuations, forensic accounting)
• Evidence of exhaustion of local remedies (for some coverages)

Subrogation: Upon claim payment, insurer typically acquires rights to pursue recovery from government or other responsible parties.

Claims Resolution Timeline

Total timeline: Claims typically resolve 12-30 months after covered event, depending on complexity and documentation quality.

Historical Claims Examples

Argentina (2001-2002): Currency devaluation and corralito (deposit freeze) triggered currency inconvertibility claims. MIGA paid approximately $45 million across multiple projects.

Venezuela (2007-present): Expropriation of oil, telecommunications, and other sectors. OPIC/DFC paid hundreds of millions in claims; private market experienced significant losses.

Libya (2011): Political violence from civil war. Multiple insurers paid claims for destroyed or abandoned assets.

When PRI Makes Sense

PRI provides value in specific investment contexts:

Strong Candidates for PRI

• Large investments representing concentrated risk in investor portfolio
• Investments in countries with recent political instability or weak rule of law
• Sectors with history of government intervention (energy, utilities, natural resources)
• Long-term investments where risk accumulates over time
• Investments without bilateral investment treaty protection
• Project finance where lenders require PRI as condition of financing

Weaker Candidates for PRI

• Small investments that can be written off without material portfolio impact
• Investments in politically stable countries with strong institutions
• Short-term, liquid investments that can be exited quickly
• Investments covered by robust bilateral investment treaties with reliable arbitration

Due Diligence Checklist

Pre-Binding Due Diligence

Before purchasing PRI coverage:

• Assess whether investment structure qualifies for coverage (equity vs. debt, direct vs. indirect)
• Verify coverage territory matches investment location (some policies have territorial limitations)
• Confirm insured perils align with primary risk concerns for the jurisdiction
• Review policy exclusions, particularly for regulatory action vs. expropriation
• Understand waiting periods and whether they align with liquidity needs
• Assess bilateral investment treaty coverage as alternative or supplement

Coverage Selection

Optimizing coverage structure:

• Consider combining MIGA/ECA coverage with private market for larger limits
• Evaluate multi-year vs. annual policies based on renewal risk and pricing
• Assess whether to include business interruption extension
• Review claims reporting obligations and documentation requirements
• Understand subrogation provisions and post-claim obligations

Ongoing Compliance

Maintaining coverage validity:

• Calendar premium payment deadlines
• Establish internal process for prompt reporting of circumstances
• Maintain documentation required for potential claims (ownership records, financial statements)
• Monitor country developments that may require notice to insurers
• Track policy renewal dates and initiate renewal discussions 90+ days in advance

Detection Signals: When to Consider PRI

You should evaluate PRI coverage if:

• Your portfolio has more than 10% exposure to a single emerging market country
• You are making an illiquid investment exceeding $10 million in a sub-investment-grade jurisdiction
• Your investment sector has experienced government intervention in the past decade
• The investment represents critical infrastructure (power, water, telecommunications)
• You cannot exit the investment within 90 days if political conditions deteriorate
• Project lenders are requiring PRI as a condition of financing

Your Next Step

For an existing emerging market investment, request a PRI indication from a broker (Marsh, Aon, and WTW all have political risk practices). The indication process is typically free and provides market pricing and capacity information. Even if you decide not to purchase, the indication reveals how the market prices risk in that specific jurisdiction and sector.

What to request:

• Coverage options for expropriation, currency inconvertibility, and political violence
• Indicative premium rates for 1-year and 3-year terms
• Available limits and any capacity constraints for the country
• Key exclusions or conditions specific to the jurisdiction

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Related: Country Risk Assessment Framework | Mapping Geopolitical Risk to Asset Classes | Sanctions and Export Controls Impact

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Sources: Berne Union (2023). Annual Report and Statistics. | MIGA (2024). Annual Report. | DFC (2024). Development Finance Corporation Overview. | Marsh (2023). Political Risk Report.