Political Risk will insure cross-border transactions against loss due to political risks such as
inconvertibility, expropriation, and political violence.
Under CEN, additional coverage can be obtained for instances when the insured's own government forces the company to abandon or divest its foreign operations or for currency
inconvertibility, civil war and insurrection.
Consequently, bankers and corporate finance professionals have adopted 'risk management' as a term for dealing with all significant fluctuations in an organization's cash flows, including not only the ups and downs of business cycles, sound and unsound business judgments, and good and bad years for accidental losses, but also disruptions from becoming bankrupt or having funds tied up in litigation or by
inconvertibility among currencies.
OPIC pays claims on losses occurring from expropriation,
inconvertibility and political violence (the latter being defined as loss of assets or income due to war, revolution, insurrection or politically motivated civil strife, terrorism and sabotage).
Developing markets often carry political risks, such as foreign asset confiscation, expropriation and nationalization, or losses resulting from political violence or currency
inconvertibility.
It also can protect against currency
inconvertibility, contract repudiation, trade embargoes or license cancellations by the U.S.
This is why insurance should be sought against confiscation, expropriation and nationalization, including coverage against
inconvertibility of earnings, as well as insurance against the acts of creeping expropriation (acts that do not involve outright expropriation, but that prevent the proper performance of the investment, e.g., withdrawal of visas of expatriate managers, canceling import licenses for vitally needed spare parts, etc.
Customer bankruptcy or payment default, trade embargo, license cancellation, confiscation, expropriation, nationalization or currency
inconvertibility. And these are only some of the financial risks of conducting business globally.
Political risks, which range from kidnap and ransom, expropriation and terrorism to currency
inconvertibility, essentially involve the risk a company takes when it invests in a foreign country.
O'Sullivan said, the biggest risk facing joint ventures is currency
inconvertibility. "The Western partner either has to circumvent the problem by entering into a creative barter or countertrade agreement or wait until the Eastern European country solves the problem," he said.
"There are definite differences, which reflect the multiplicity of economic, cultural and legal systems found around the world." Special coverages include political risk insurance; kidnap and ransom; "gap" policies; war, revolution and insurrection; expropriation; and
inconvertibility of currency.
