The role of political risk insurance in investing
The role of political risk insurance when investing
Over the past 30 years, the context of political risk has evolved rapidly, presenting industries and investors with new challenges. As geopolitical environments around the world gradually become more complex, so does trading because of the growing political risks. Investors and banks now view political risk assessments and political risk insurance (PRI) as a requisite when a company invests in a country, to ensure there is sufficient coverage in the case of any events that impact the company’s operations. PRI also provides enterprise with the required support to rebuild and continue operating after an event.
“Looking back at recent events in South Africa, it is even more prevalent to have such cover in place to safeguard business operations and avoid downtime,” states Cresco Director Rob Futter. “An in-depth political risk assessment is an extremely important step for any company to take before making a substantial investment on a particular project,” Futter adds.
Political risk assessment
The first step in mitigating any potential risk in a country is to complete a thorough analysis of the environment. “Forewarned is forearmed. Understanding the potential risks and their variables empowers detailed planning to manage them and even mitigate certain risks to ensure the profitability and continuation of your investments,” Futter avers. There are three levels of political risk to consider: transnational, national, and civil society factors. Transnational or geopolitical risks relate to risk emanating from changes in policies in defined policy arenas. Examples of this include countries changing trade agreements when a new head of state is inaugurated or conflicts between countries affecting trade and investment.
National or country risks emerge when the stability of the government or other crucial institutions are called into question. This instability, perceived or real, can have grave economic consequences for a country and the companies that invest in them. For example, corruption or continual policy shifts can hinder businesses by increasing the cost of doing business and impact the stability of specific industries.
Civil society factors refer to groups within a country that have a substantial amount of influence in a country, ranging from trade unions to consumer groups. They can organise boycotts, protests, and other actions that disrupt the normal business operations.
Political risk insurance
Once a proper political assessment has been completed, companies can decide on the best course of action. For some companies and their investors, the political risks of a country may outweigh the benefits of working and investing in the country. For other organisations the next step will be looking into how to mitigate the risks they have uncovered. This is where PRI comes in.
PRI is able to cover companies for a variety of events that may occur as the result of any political changes or nuances. The PRI a company decides to invest in, will be dependent on the results of the initial assessment. PRI includes a wide variety of products that can be specifically tailored to any investor’s need, covering the entire range of politically induced risks. This includes, but is not limited to:
- Abandonment of operations
- Riots, looting, and civil unrest events
- Loss of income
- Breach of contract
- Property damage due to political violence
- And more
With their vast experience across Africa, and a close working partnership with leading specialist risk insurance broker BPL Global, Cresco is well placed to assist with your political risk assessment and subsequent PRI. Consult with an advisor today: https://www.crescogroup.africa/contact-us/