Companies with global operations may face many political risks not typically covered under their existing insurance policies. Increased demand for protection against international risk exposures has led insurance companies to develop policies such as Political Risk and Credit Insurance.
Political Risk Insurance (PRI)
PRI has long been a government tool for reducing risk associated with foreign trade and direct investment. It first appeared in the early 1970s, but due to rising political and economic instability, it has emerged as a way to help companies doing business or conducting operations in foreign countries protect assets and financial interests from losses due to governmental action – either foreign or domestic.
There is no standard political risk policy. It can be long-term or short-term and can provide coverage for a variety of risks, such as expropriation of property, political violence, currency inconvertibility, forced abandonment or forced divestiture, consequential financial loss, non-repossession of an asset, trading risks, and breach of contract.
Designed to provide comprehensive coverage on trade and export finance exposure, credit insurance protects companies against losses from non-payment of a commercial trade debt by insuring against a buyer that has declared bankruptcy, insolvency, or a similar legal status. It can also protect insureds from buyers who delay payments under a bankruptcy protection arrangement.
An essential risk management tool, credit insurance not only provides valuable protection, it can help with controlling risks, improving payment behavior, and expense monitoring. Some policies can even include a component of political risk insurance.
Credit insurance policies are flexible and can be tailored to cover a company’s entire portfolio or just key accounts, but there must be a direct trade link. Typically, the policy pays out a percentage of the outstanding debt.
For companies doing business around the world, managing risk is essential. As political concerns increase, so will the need for insurance coverage that offers protection from unpredictable, international exposures.
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