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A guide to political risks and insurance implications

At a glance

  • Increasingly globalised economies will push political risk up the agenda for many organisations
  • Continued conflict and economic instability have become major global themes
  • Zurich can help organisations protect against risks, including political violence and currency inconvertibility

In an uncertain world, organisations pursuing international growth should consider placing political risk at the centre of wider risk management strategies.

In the World Economic Forum’s Global Risks Report 2017, geopolitical risks featured in both the Top 5 Global Risks in Terms of Likelihood and Top 5 Global Risks in Terms of Impact lists.

Emerging markets often represent the most significant growth opportunities for organisations looking to expand internationally, but can also be home to considerable risk and volatility.

Meanwhile, established markets are not immune to substantial political risk, with a greater number of elections and government collapses in the last three years than over the whole of the last decade.

Shifting risk landscapes have been evidenced in both the frequency and severity of political risk insurance claims, with Zurich seeing its highest level of claims in decades.

Organisations looking to capitalise on international growth should keep political risk at the heart of risk management planning and strategy.

Read more about Credit and Political Risk

Global trends and the increasing importance of political risk coverage

Geopolitical risks represent particularly challenging obstacles for organisations operating internationally. They are hard to predict and can have wide-ranging and complex implications. This makes political risk insurance an important tool for all businesses looking to expand their international base.

Despite the aims of many organisations to pursue international expansion, many national governments have instead been turning their gaze inwards and adopting increasingly protectionist stances.

The impact of the UK’s vote to leave the EU will be felt for some time, and continued uncertainty is likely to have significant implications for organisations operating across Europe.

In the US, President Trump has made moves to radically shake up the international status quo, which could yet see alterations to trade deals and hitherto solid international relationships.

The anti-establishment wave that carried the President to the White House has also been felt in Europe. While many of these anti-establishment parties are unlikely to win power, they can influence national debate and policy and open up political risks for business.

In many emerging markets, particularly Latin America, ongoing political crises and a slow down in growth rates are likely to have a significant impact on foreign organisations operating in the region. Emerging markets in North Africa and the Middle East still look to be the most unstable, with conflict, civil war and severe economic instability being seen in many countries.

These trends are united in their unpredictability, and all have the potential to pose significant risk for organisations operating, selling or sourcing overseas.

Differing forms of political risk and what Zurich can offer

Geopolitical risk can take many forms, ranging from infrastructure and supply chain disruption to a breakdown in the rule of law, expropriation or even war. Common forms of political risk protection offered by Zurich include:

Expropriation – designed to protect against losses resulting from confiscation, nationalisation, expropriation or other actions by a host government that deprive an organisation of the fundamental right to its investment or cause it to default on loans.

Political violence – guards against losses resulting from damage or destruction of assets or business interruption caused by political violence (which can include war, revolution, civil unrest, insurrection or sabotage). Replacement cost compensation is provided for lost and/or damaged assets.

Currency inconvertibility – provides coverage in the event of an inability to convert local currency into hard currency and repatriate converted currency. Dividends, capital and loan payments are all eligible for coverage.

Non-honouring of sovereign guarantee – protects financial institutions, contractors and exporters in the event of payment defaults by sovereign states and/or state-owned entities. Coverage can apply to payment defaults under direct loans, letters of credit from state owned banks, sales contracts agreed with state-owned businesses and loan guarantees.

Why partner with Zurich?

For organisations operating, sourcing and selling internationally, it is vital to understand these political risks and likely business impacts. In the face of continued geopolitical risk, Zurich can provide support for multinational organisations and those pursuing international expansion goals.

Zurich offers flexible political risk insurance, specifically designed to meet the long-term requirements of businesses operating overseas in both established and emerging markets.

Features of Zurich’s political risk coverage include an ability to extend terms up to 15 years, capacity of up to $150m per transaction and the option to take out multi-country and global programmes.

To find out more about identifying and managing political risk, please speak with your local Zurich contact.

Image © Getty

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