POLITICAL RISK INSURANCE IN INDIA – Dire need in the Global Context:

Prologue: 

The Indian financial market witnessed exciting twists and turns throughout 2019 due to political, economic, social and corporate events, both global and domestic. There is a definite growing global presence of India in the International market – that brings the danger of a greater exposure to political risk by the Indian Companies working abroad.

What is Political Risk:

The political risks are intangible risks being faced by the firms who are doing business internationally arising from the action of the insured’s Government / Foreign government because of wars, riots, coups and embargoes, etc. The dangers of politics now hang over companies as diverse as fruit growers in Latin America, film producers in Fjii and bankers in Dubai, London or New York.

What is political Risk Insurance: 

Political Risk Insurance (PRI) is to mitigate and manage risks arising from adverse government actions, confiscation of assets, breach of contract or war and civil strife. PRI allows investors to concentrate on this commercial aspects of investments, with the comfort that someone else – PRI providers will help them avoid potential losses, or reimburse them in case of a covered loss.

Political risk insurance is available covering several types of political risk, including:

• Political violence, such as revolution, insurrection, civil unrest, terrorism or war
• Government confiscation of assets
• Governmental frustration or repudiation of contracts
• Wrongful calling of letter of credit or similar or demand guarantees and
• Inconvertibility of foreign currency or the inability to repatriate funds.

India’s PRI market is still miniscule by global standards. Export Credit Guaranty Corporation (ECGC) in India has virtual monopoly to issue political risk insurance cover for credit risks.

Political Risk insurance policy:

An insurance policy is bought by companies to cover losses arising out of adverse political developments in foreign countries where they have their projects or businesses.

The forced exit of GMR infrastructure from Maldives earlier has caused a huge loss to the Indian company which could have easily cut its losses had it purchased a political risk cover. Banks drive the purchase of political risk covers and do not lend to projects without this insurance. Political Risk Insurance protects an insured in case a foreign entity confiscates its goods or equipment and protects an insured in case a foreign government refuses to pay a contract or interferes with the fulfillment of a contract.

PRI protects foreign investments against:

1. Forced Abandonment
2. Confiscation, Expropriation, Nationalisation, Deprivation
3. Import or export restriction as & when being imposed on trade.
4. Breach of Government Undertaking
5. Political Violence
6. Currency inconvertibility or non – transfer
7. Business interruption.

Political Risk insurance protects the contracts against the risk of:

Non – payment by buyers. The precise scope of coverage is governed  by the terms of the insurance policy, depending on the host countries” political situation (i.e., destination of the investment and sector or type of the investment)

Conclusion:

PRI in India is now being considered as a tool to protect assets in foreign countries due to political instability world over.