Political risk insurance is a unique subset of private insurance, used to cover infrastructure developers, importers and exporters, and other such companies from financial loss, due to the forced abandonment of a project or a client due to political instability, such as government action, political violence, and other political events that occur in a foreign government.
Often, political risk insurance is bundled with trade credit insurance, which is a type of insurance that covers the costs associated with a customer not paying their invoices, due to default or bankruptcy.
Curious to learn more about political risk insurance and what it covers? Read on, and learn everything you need to know.
What Coverage Does Political Risk Insurance Include? What’s Excluded?
The coverage that your political risk insurance will offer depends on your insurance company, and your policy. However, as a rule, most companies in the insurance market will offer political and economic risk insurance for the following events:
- Political violence – This includes things like armed revolution, insurrection, war and civil war, terrorism, and other such political instability that can stop a project or a sale to a foreign country.
- Governmental expropriation or confiscation – Should your property or project be confiscated by the government, political risk insurance can be purchased that will cover the cost of this confiscation.
- Government repudiation or frustration of contracts – Most political risk insurance policies include provisions that cover costs if a government claims that a contract cannot be carried out, or unforeseen events lead to contract frustrations.
- Wrongful or improper calling of letters of credit – If a government or foreign financial institutions wrongfully call in a letter of credit, or another on-demand guarantee, insurance can cover the associated costs.
- Business interruption – The costs of business interruption during a political event or other unforeseen circumstances can be covered by a political risk insurance policy, ensuring steady cash flow.
- Inability to repatriate funds or convert foreign currency – If banking and currency issues, such as hyperinflation or a ban on moving currency to foreign countries results in the inability for your company to be paid, your policy will likely cover these costs.
Though other types of coverage may be offered, these are the most common. Often, you’ll have the ability to choose between each type of coverage, or purchase a policy that includes coverage for all major political risks.
Why Is Political Risk Insurance Important?
Because it helps you ensure long term success when working in emerging markets. It’s usually not necessary when working in OECD countries, and with companies in very stable countries – but it’s absolutely essential if you want to expand your reach, and work in countries that are not yet fully developed.
In the rare case that political instability results in a serious financial loss, your insurance company will step in, and compensate you for these lost funds – which ensures that your business can survive, even if it loses some of its biggest customers. This gives you peace of mind when working with customers and companies in developing countries.
Learn More From Niche Trade Credit Now!
At Niche Trade Credit, we’re experts when it comes to both political risk insurance and trade credit insurance. We can ensure that you have the right policy, and are protected from any political risks in the countries where you sell your products or services. Get started by contacting us right away.
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