From a broad perspective, insurance is defined as a financial device to hedge against a future potential loss. Investors use insurance as a technique to mitigate a variety of factors that could (and catastrophically) negatively impact an investment or an asset; like a company, a person, or even a nation.
Political risk insurance guards an investment’s earning power, or an asset’s value against the damage that can be felt from a geopolitical event. It is profoundly challenging foreseeing which political event will happen, and where it will happen, because a harmful political event can happen anywhere, and, at any time.
This is the reason shrewd investment holders proactively manage the level of geopolitical risk they face in their industry or, in their part of the world.
Who Purchases Political Risk Insurance?
International organizations, multi-national companies, and even governments search for ways to mitigate the damage in the face of very real risk. Purchasing political risk insurance allows for the day-to-day managers to focus on the daily operations by reducing the insidious distraction of fear/anxiety.
The largest portion of political risk insurance purchasers include:
- Financial Corporations
- Importers & Exporters
- Foreign Investors
- Engineering & Construction Contractors
- Financial Marketplaces
Perhaps the most obvious political decisions that can impact an organization or business are handed-down from the home country’s own government. These include modified regulations, tax revisions, or even a change in the way currency is valued.
Political Risk Insurance — A Business Example
In general, a ‘for-profit’ company’s primary objective is to turn a profit. And, if you scan the business landscape it is easy to see just how many ways there are to do this. But what happens when the marketplace is saturated? What happens if a business cannot grab enough of a market to turn a profit?
Ingenuity and business acumen take over.
Many businesses have teams of individuals who champion projects with a specific goal — to identify potential business opportunities — anywhere they might be found. Many profitable business ventures are outside developed countries, in what is known in the business world as an ‘emerging market.’
Business opportunities in emerging markets can often be wildly profitable; however, a great rate-of-return generally speaks to uncomfortable risk. Consider it a financial law of physics — Greater Potential = Higher Risk.
In general, an emerging market is situated in a non-developed market. An emerging marketplace is typically indicative of political turmoil. In fact, many businesses would choose to stay out of an emerging marketplace, if political risk insurance were not available.
The Take-Away
Political risk insurance is one of the simplest ways to protect an investment or asset against political instability and unrest. Unfortunately, the political insurance marketplace is most busy after a geopolitical event has happened, and the damage has been done.
Plan ahead. Sadly, geopolitical unrest — across the globe — is on the rise, at least for now.