Does your firm need political risk cover?

The forced exit of GMR Infrastructure from Maldives earlier this month caused a huge loss to the Indian company. But GMR, which has claimed a compensation of $800 million from the Maldives government, could have easily cut its losses had it purchased a political risk cover. ET explains the concept:

WHAT IS A POLITICAL RISK COVER?

It is an insurance policy bought by companies to cover losses arising out of adverse political developments in foreign countries where they have their projects or businesses. Such policies cover losses caused by political violence, such as revolutions, civil unrest, terrorism or war; confiscation of assets by governments; wrongful calling of letters of credit; and business interruption. Such policies have a standard risk coverage format, though they can be modified to suit the requirements of the client.

SHOULD ALL COMPANIES INVESTING ABROAD BUY IT?

A decision to buy such covers depends upon a company’s own assessment of risk, its concerns about political risks associated with its specific investments abroad. Sometimes, banks drive the purchase of political risk covers. Many banks do not lend to projects without this insurance, either because of their own internal risk management concerns or because they have reached their lending limits for a given country.

WHO PROVIDES THIS COVER?

Export Credit Guarantee Corporation, a government enterprise, provides this insurance in India. Any company investing outside India can buy a risk cover from ECGC or the Multilateral Investment Guarantee Agency, a member of World Bank Group. ECGC bears 85% of the loss, which is part of a comprehensive cover. ECGC, however, cannot provide cover to overseas companies investing in India as it cannot cover sovereign risk, which is generally bought through a broker.

HOW MUCH DOES THIS COST?

The premium varies from country to country. Underwriting of political risk insurance is a dynamic process and depends on the situation in that particular country. The size of a political risk insurance policy is generally equal to the investment made by the company abroad.