What the policy covers
Political risk insurance responds to defined perils: expropriation, currency inconvertibility and transfer restriction, political violence, and — in many policies — breach of contract by a government counterparty. Cover is available from multilateral, national, and commercial providers, with differing appetites and terms.
For assets in markets where these risks are real, the cover is valuable and frequently a condition of lender participation.
Where expectations diverge
Creeping expropriation. Outright nationalisation is rare. What happens more often is a series of measures — tax changes, licence conditions, tariff decisions — that erode value without any single act of taking. Whether the policy responds depends on its wording and on how the events are characterised, and this is the most litigated area of the product.
Currency inconvertibility versus devaluation. Cover typically responds when currency cannot be converted or transferred. It does not respond to the currency simply losing value. Sponsors sometimes believe they are covered for devaluation; they are not.
Breach of contract. Where covered, there is usually a requirement to obtain an arbitral award first and to demonstrate the award has not been honoured. That sequence takes years, and it is the reason breach-of-contract cover is slower to pay than sponsors expect.
Waiting periods. Most policies have a waiting period between the event and a payable claim. During that period the project still has obligations.
Practical use
- Read the trigger definitions against the specific risks of the asset, not the category
- Understand the claims sequence, particularly where an award is a precondition
- Size liquidity separately: insurance protects capital, not cash flow during the waiting period
- Check whether lenders are co-insured or assigned, and what that requires of them
- Where creeping measures are the realistic risk, negotiate the wording rather than accepting the standard form
Its real function
Political risk insurance is most useful as part of a package: it protects against severe defined events while other mechanisms — liquidity facilities, guarantees, contractual protections — handle the more common problems. Used as a general comfort, it disappoints. Used precisely, against risks it is written to cover, it enables financings that would not otherwise happen.
