Political Risk Insurance

Shipments to otherwise financially strong buyers outside of the United States and Canada may not necessitate the need to cover such buyers from ‘commercial’ risk of loss perils such as bankruptcy and slow payment behavior. However, there is another set of risk of loss perils that can jeopardize the full and timely payment of a supplier’s invoices to such international customers – ‘Political’ Risk of Loss Perils. Political Risk Only Insurance covers a number of risks that are usually beyond the control of the supplier, caused by the host government of the supplier’s international buyer (Buyer). Such ‘political’ risks of loss events insured include: 

Inability of the Buyer to obtain foreign exchange (U.S. Dollars or other approved currency as required in the invoice and sales contract (Approved Currency).

Failure of the Buyer’s home country to convert local currency to U.S. Dollars or other Approved Currency and transfer same to the supplier in the supplier’s country when such failure is not due to the fault of the supplier or Buyer.

Cancellation or non-renewal of any export license.Cancellation of previously issued, valid import license. War, hostilities, civil war, rebellion, revolution, civil commotion or other like disturbance or the confiscation, expropriation or nationalization actions (arbitrary and discriminating) taken by a governmental authority in the Buyer’s country.

Political Risk Only Insurance does NOT cover a loss resulting from a Buyer’s insolvency, slow pay behavior or foreign currency devaluation. These latter risk of loss event perils are deemed to be ‘commercial’ risks of loss and not insured under Policy Risk Only Insurance contracts.

Emphasis on political risk has declined recently, relegated to the confines of specialty consultancies and research organizations. It was believed globalization and economic liberalization had ushered in an era of investment-friendly policy and technologies that afforded firms flexibility to sidestep operational disruptions caused by violence. The financial crisis and evolving global architecture has proven that instability still exists and dismissing political risk was premature. 

Too often firms discount political risks to their strategies, costs, and returns. Events in Egypt help underscore the potential downfall of such miscalculations.  

Finally, there are export risks in play, including potential transportation disruptions, as well as counterparty risks should Egyptian firms be unable to fulfill their financial commitments to exporters. Many Egyptian ports have ground to a halt during the crisis, and while the Suez Canal remains open, circumstances are fluid. If the Suez were to close, the impact on global trade could be monumental, as the corridor is a major transshipment point for cargo travelling from the Middle East and South Asia through the Mediterranean. A shutdown would increase transportation costs and agitate oil markets, further raising input costs for producers worldwide.These so-called “fat tails” are low probability high impact events. according to the Financial Times, nearly $127 billion in direct investment flow into Egypt since 2002


Credit Insurance

Covers 2 types of risks –

  1. commercial and political risks.
  2. Insolvency of the buyer
  3. Non-payment by the buyer

Surety Bonds

  1. Bid Bond: Provides financial protection to the owner if a bidder is awarded a contract but fails to sign the contract or provide the required performance and payment bonds.
  2. Performance Bond: Provides an owner with a guarantee that, in the event of a contractor’s default, the surety will complete or cause to be completed the contract.
  3. Payment Bond: Ensures that certain subcontractors and suppliers will be paid for labor and materials incorporated into a construction contract.
  4. Warranty Bond (also called a Maintenance Bond): Guarantees the owner that any workmanship and material defects found in the original construction will be repaired during the warranty period.

Trade Finance

An exporter of goods runs the risk that they are never paid for goods that are shipped. To eliminate that risk they can require pre-payment, but that shifts the risk onto the importer.
Overseas trade also comes with inherent risks, for example, exchange rate fluctuations, legal issues, language differences and the potential for political instability. Furthermore, it’s trickier for parties to evaluate the credit risk of their counterparts when they’re based overseas.
Trade finance steps in to guarantee payment and shipment, provided certain conditions are met.