Do all companies doing business internationally need political risk insurance?
If you’re an extractive-industries type of company such as mining or oil and gas and you’re working in Africa or parts of the Middle East, you may have invested a lot of money into a project and that project may or may not be impacted by a government action. If you have investors and shareholders and boards of directors, you can experience a big balance sheet hit. And if you aren’t covered, then you’ve just taken a huge uninsured loss.
Publicly traded companies tend to take a more conservative view; privately held ones may have a completely different outlook. There are companies out there that are used to taking risks.
Can you pick and choose which projects you want to have covered?
You can get coverage for individual projects and, theoretically, you can get it for as long as you want. There are some top-end limitations; in other words, you can’t get it for 100 years. But policies will traditionally go out for five, 10 or 20 years. Again, it depends on how long it takes to complete the project. If you’re buying coverage for your company’s ongoing operations and not a specific project, that can also be done on a multiyear basis with annual extensions.
What else should businesses know about political risk?
There are a couple of real life examples where political risk insurance has proven to be helpful. Let’s say you’re a lender and a client wants to borrow money to build a plant in South Africa. The bank may like the project and business plan but may be concerned about the political climate in South Africa. So the bank may take a policy out to protect its loan and/or the parent company may take out the policy and assign it to the bank as an alternative.
Or, say you have an operation and a bank account in Venezuela containing millions of dollars. If President Hugo Chaves decides he’s going to nationalize your company, then the money in your bank account could get swept up with the rest of it. That happened recently when Chavez decided a U.S.-held company was charging too much for its product and causing prices in the country to inflate.
John Hertzer is vice president at Aon Risk Services, Inc. Reach him at (412) 594-7603 or [email protected].
