Private and Official Sources of Political Risk Coverage

In recent years, insurance against political risks affecting international investments and trade transactions has developed in the private market alongside the coverage offered by national and multilateral underwriters of such exposures. The private and official markets can be sources of both complementary and alternative coverage. Each of these markets has its particular advantages and limitations for the purchaser of political risk insurance.

The Private Market
Private carriers of political risk coverage generally are more flexible than official insurers since their operations are not inhibited by considerations of public policy or international relations. As a result, private political risk insurers are capable of underwriting exposures attendant to new and existing investments in any country without regard to such factors as the investor’s nationality, the host country’s level of economic development, or the investment’s economic effects upon the investor’s home country. In addition, private underwriters generally offer political risk coverage for both trade and investment exposures, and, since many carriers also provide standard property and casualty insurance, they may offer, on very favorable terms, coverage packages combining political and commercial risk protection. Furthermore, unlike official insurers, whose assistance is a matter of public record and which must be disclosed to host country governments, private underwriters generally regard the existence of their insurance as a confidential matter.

The Official Market
Official insurers, while lacking some of the flexibility and advantages available through the private political risk insurance market, offer other special capabilities. Official insurers commonly underwrite the risks of currency inconvertibility and political violence. Furthermore, official political risk insurers are able to provide coverage which is bound, at fixed rates, for durations commensurate with the long-term exposures (up to 20 years) attendant to most investment projects. In recent years, the private market has begun to offer coverage for up to 15 years.

OPIC and the Private Market
While some investors may be able to secure investment insurance that meets their needs exclusively in the official market or the private market, in some circumstances it will be necessary or advantageous for them to use both markets to obtain the coverage that most closely accommodates their needs. OPIC encourages prospective clients to consider the availability of private political risk insurance and welcomes the opportunity to cooperate with private underwriters to provide coverage that most closely accommodates U.S. investors’ insurance requirements. The following examples illustrate some of the ways in which OPIC insurance can be combined with private market coverage in order to satisfy investors’ needs.

Old and New Investments
OPIC insurance is available for investments in new ventures and for privatizations, expansions, or modernizations of existing enterprises. Consequently, OPIC may be unable to provide complete coverage in the event that an investor wishes to insure existing as well as prospective investments in a venture. In such circumstances, the investor may be able to obtain the political risk protection it needs by insuring new investments with OPIC and securing coverage through the private market for its existing exposures.

Different Markets for Different Coverages
For some investments, all of the coverages desired may not be available from either private or official insurers. For instance, private insurers may be willing to assume only an investor’s expropriation risk, whereas OPIC may be willing to underwrite other exposures as well. In such cases, the investor may purchase expropriation coverage from a private carrier and protect its investment against inconvertibility and political violence exposures with OPIC insurance. Similarly, investors may be able to obtain private market coverage exclusively for events that are not compensable under OPIC’s insurance contracts, such as partial expropriations or losses related to U.S. economic embargoes.

Avoiding Overlap
In certain circumstances, an investor’s commercial or property/casualty coverage may contain limited elements of political risk protection that are provided for under OPIC’s standard coverage, such as insurance against damage to physical assets resulting from politically-motivated civil commotion or disturbances. If requested to do so, OPIC or the private market may tailor their coverage in order to exclude any redundant elements, thereby contributing to the cost effectiveness of the investor’s insurance requirements.

Coinsurance Opportunities
For large investments or for projects in countries in which insurers possess limited underwriting capacity, sometimes neither private nor official insurers alone may offer enough of a coverage to satisfy investors’ needs. In such circumstances, OPIC insurance may be combined with private market coverage in order to provide a sufficient amount of political risk protection. When the same type of coverage is provided jointly by OPIC and a private carrier, arrangements for claims management can be established at the outset to ensure proper coordination of the insurers’ actions in the event of a claim.

Cooperation to Extend OPIC Coverage
When OPIC policies reach their twenty year expiration, they may be continued if a U.S. insurer is willing to assume at least one half of the risk. This risk-sharing may be achieved by equal assumption of the same risk(s) by OPIC and the private carrier or by each insurer underwriting a separate risk covered by the expiring policy.