Russia and Ukraine Exposures Trigger Interest in Political Risk Cover

Recent events have increased interest in political risk insurance in Russia and Ukraine, says Kirk Pasich of US law firm Dickstein Shapiro.

Pasich, a partner at the firm’s Washington, DC office, says it also appears that insurers have stopped underwriting political risk insurance, at least for exposures in Ukraine for the time being. Many insurers are declining to quote on Russian exposures, or are subjecting new inquiries to greater, and slower, underwriting scrutiny.

The situation is exacerbated by threats and implementation of economic sanctions, which could lead to responsive economic measures, changes in the laws, or even steps by the governments resulting in payment delays or seizure or reprisals against foreign assets in those countries.

Pasich says that political risk insurance takes many forms and can protect direct investors or those who do business with foreign governments or businesses. Common forms of political risk insurance include:

Contract frustration insurance:
This protects an insured’s trade or sales contract with a foreign company from the action (or inaction) of the foreign government. The risks insured may include the risks of confiscation, nationalisation, expropriation, or changes in the foreign country’s law.

The policies typically require that the government’s action or inaction result in the termination of the contract, prevent the performance of the contract, or result in the foreign company having a valid discharge of its duties under the contract. This coverage also may protect against losses from an embargo or license cancellation, from war, political violence, insurrection, actions by armed forces, strikes, riots, and other specified events that prevent the performance of the contract.

Currency inconvertibility insurance:
This protects an insured doing business in a foreign country from losses if it cannot convert the foreign currency into US dollars (USD). It typically applies when a foreign government enacts new currency restrictions or prevents the conversion or transfer of the insured’s funds generated in connection with its investment in the foreign country from local currency into USD.

Expropriation insurance
: Protects an insured’s investment or assets in a foreign country from a foreign government’s unlawful confiscation, nationalisation, or expropriation.

Political violence insurance:
Protects an insured against property and income losses incurred as a result of war, civil unrest, revolution, riots, and politically motivated terrorism.

Terrorism insurance:
Protects an insured against losses from violent acts, including acts involving chemical, biological, or other weapons of mass destruction, by individuals or groups. Terrorism coverage typically is significantly narrower than political violence coverage.

Coverage also can be tailored to meet specific needs through the private insurance marketplace, including underwriters at Lloyd’s of London or AIG.

Pasich adds that the recent situation seen with Russia and Ukraine is not unusual in terms of triggering interest in political risk insurance and highlights why businesses should consider it.

However, the events of the past few weeks also highlight that when there is a ‘hot spot’ of activity in a particular region, it makes procurement of political insurance in the aftermath difficult and, if available, expensive. Therefore, political risk insurance should be considered before there is an issue. Once the issue arises, it may be too late.

While the likelihood of events happening that might trigger political risk insurance may not be predicted with certainty, several major insurance brokers post political risk ‘maps’ or assessments that indicate possible risk levels. While not perfect, they could provide guidance to those considering a possible need for political risk insurance.

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