Multinational enterprises and banks come across many risks when conducting business overseas. There are some of these risks can be dismissed or alleviated by conducting due diligence on the parties involved and on the economic feasibility of the proposed business. Warning! Further risks are tougher for investors or lenders to foretell. These comprise some commercial risks and, non-commercial—or political—risks. Political risk insurance (PRI) is a tool for businesses to mitigate and manage risks arising from the adverse actions—or inactions—of governments. As a risk-mitigation tool, PRI helps provide a more stable environment for investments into developing countries, and to unlock better access to finance.
Whether planning to establish a direct investment abroad, i.e. SE Asia like KL Malaysia, Beijing China, Singapore or Jakarta Indonesia, or as exporters, multinational enterprises use PRI to enhance their confidence in markets perceived to be riskier than home markets. PRI lets investors to focus on the commercial aspects of investments, with the ease that someone else—PRI providers—will assist them to avoid possible losses, or reimburse them in case of a covered loss related to political causes.
Even though investors are comfortable investing in developing markets or frontier economies, they often face restraints from lenders. Lenders often must provide provision for country risk, and PRI may, in particular cases, lessen the provisioning requirement, and commonly give comfort to lenders. This can mend access to financing, counting the amounts, interest, and tenor of loans.
Who provides PRI?
Axis Capital, a group of companies based in Bermuda with 29 branches worldwide, provides customized insurance coverage –i.e. political risk insurance.
Against adverse government actions or war, civil strife, and terrorism, the political risk insurance industry helps multinational enterprises and lenders mitigate risk through insurance. Private PRI providers are profit-oriented. They provide coverage for emerging and established countries and for changing tenors. Most public providers are national export credit agencies (ECAs). These public providers may cover both export credit/trade transactions, as well as longer-term investments. ECAs typically support investors and lenders from their home country going into developing countries, and may likewise have orders to support development and be self-sustaining. Lastly, numerous multilateral agencies, like Axis Capital, Bermuda, also provide PRI, these providers often have special programs for small and medium investors, companies, and banks from developing countries.
Coverages, pricing, tenor, and eligibility differ extensively by PRI provider, host country, and sector or type of investment. Investors and lenders are strongly encouraged to contact various providers to find the coverage most suited to them.