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Sunday, May 01, 2011

insuring against the risk of political change

If you can buy the policy you can insure against even a changing world.
Political Risk Insurance

Business and politics are related in many ways, one usually interferes in the problems of the other. Now, when it comes to the political risk insurance, this practically means you ensure yourself against the possibility of a revolution, a riot, and an embargo, things which could damage your business and which come from the political sphere in general.

It may sound unusual to most of you this type of insurance, but if you better think about it, even if chances are very little, it can still happen, and then if your business is insured you will get the compensation. Especially in a period of recession and political unrest in general floating around the globe, you can be sure that many nations would gladly consider political risk insurance as yet another assurance that their business will not be totally lost.
Political risk is also something both small businesses and great businesses can encounter, of course depending on the type of business you are running. Surely not only revolutions constitute political risk for your business, because when you work in the trading system, then your business is not depending only by the good atmosphere of your country but also heavily relies on what the situation is in the countries which you trade with. If it happens that you are having a trading business with one of the countries where a civil war is going on, then you can imagine what impact that might have on your transactions; or, while you are in the middle of a trading transaction with any country and there is an out of the blue interdiction (ban) on all imports and exports, then there is again loss for your business.
All these examples constitute political risk factors, therefore best is if you opt for he political risk insurance, especially if your business involves operations through other countries as well, such as the field of international trade.

Political risk insurance offers a broader coverage and in general could be categorized as offering protection in the cases of breach of contract risk, which stands for the fact when two parties are involved in an agreement and one of the two refuses to fulfill his obligations. Then, there is the case of non payment by a sovereign obligor, which can be the case if you are operating your business on the territory of a foreign country and the state would have the obligation to make payments towards you, but it cannot do so for several reasons. Also, expropriation is another shaky term when it comes to business and that is why this area is also covered by most political risk insurances. Political violence risk is yet another fact one can face when it comes to business, and it can constitute a risk factor that may seriously damage the business.

Political violence is a fact that arises suddenly and most of the times there is no time to thinking and before you know it you have to suspend all your activities pertaining to your business. You also have to take into consideration the conversion risk which appears when the currency of your place of business (the Sri Lankan Rupee LKR, as an example) reaches a state that it simply cannot be converted into USD or EUR for example. Conversion risk can be a real damage to your business and if you are not insured against this factor as well, it can really put barriers on your business, and you will find yourself in the inability of making any other transactions for example. Stagnation, however small for almost any business can bring really huge losses which are pretty hard to recuperate. Transfer risk is somewhat similar to conversion risk in that it has to do with money again, but this time it means you are having difficulties (or find yourself in the impossibility) of making transfers of USD from the respective country. This is again a result of the country’s internal policy and its politics in general but you see how easily it can reflect in your business operations.

As seen, all these risks presented have an unfavorable impact on your business but especially on your profit, most of the times even if your business has nothing to do with the political frictions of the respective state, still it has to seriously suffer from these. This is why if you feel you are not informed enough as to what the political risk insurance means, or as to what degree is your business exposed to political risks, it is always good to find a consultant, an expert who can give you the necessary information and also explain to you all the important points.

As already stated, political risk insurances are especially suitable for those of you who do international business, first of all because it is a safe protection to you and your business because you are outside the borders of your country and therefore your business is no longer under the regulations you were used to in your country. You simply cannot let your business, for which you may have perhaps worked for years and years and you met hardships until you managed to outsource it, now you cannot let it become a victim of a political system which is wrong, especially if you are working to import food to the country. This is he case of a paradox then, where you are working to do good for a nation and in exchange you get “beaten”.

It is good to opt for a political risk insurance, and with the necessary knowledge you may build yourself and your business some sort of protection. Especially if you choose an insurance company which can offer you a stand alone political risk insurance, then be sure that the policy will have some hot points like for example, in case of your business being at high risk, they have the ability to make certain negotiations with the governmental institutions in order to obtain the best result for you.
The two questions that come to mind are
  1. what sort of insurance license does one need to gain?
  2. how does one become affiliated with a company in order to sell such coverage?

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