C6. Political Risk Insurance

Governments can support companies’ overseas investments by offering political risk insurance. Such insurance commonly covers unlawful host government interference and breach of commitments by the host country government, such as nationalisation, expropriation, embargoes and preventing the transfer of funds out of the host country. It also insures against circumstances that might jeopardise an investment such as war, armed conflicts and political violence. In some countries and industrial sectors political risk is heightened, for example when large-scale investments are made in natural resources sectors in politically unstable contexts. In such situations, some MNEs are willing to pay a premium and purchase political risk insurance to reduce their exposure to the associated investment risks. Many countries have been offering political risk insurance to outward investors, which can support investment projects that promise to generate home-country effects (UNESCAP 2020, Sauvant et al. 2014).

Public financial institutions such as export credit agencies commonly act as providers of such insurance, though private institutions and international organisations might also offer corresponding insurance products. The Multilateral Investment Guarantee Agency (MIGA) is an international organisation associated with the World Bank Group that offers political risk insurance to MNEs from member countries. It can be a viable alternative, especially if particular governments do not offer their own political risk insurance scheme.

Key insights

• Many governments offer insurance to protect companies’ overseas investments against various kinds of political risk.
• The export credit agency is often the institution responsible for political risk insurance.
• MIGA also offers political risk insurance to MNEs from member countries.