Kempkey Insurance and Risk Management Services

Political Risks

Oct 24, 2016

Since this is an election year and there is so much politicking going on, I thought I would check on the meaning of political risk. As it turns out, there are many definitions, so you can choose the one that suits you best from the following list:

Probability of loss due to political instability in the buyer’s country that may result in cancellation of a license or otherwise affect the buyer’s ability to make payments. Political risks are insurable risks, and overlap with the political component of force majeure risks. (Business Dictionary)

The risk of nonpayment on an export contract or project due to action by an importer’s or buyer’s host government. Such action may include intervention to prevent the transfer of payments, cancellation of a license, or acts of war or civil war. Nonpayment by sovereign buyers themselves is also a political risk. Political risk is one of the two main categories of risks insured by credit insurers (the other being commercial risk). (Export Finance Guide)

The risk of operating or investing in a country where political changes may have an adverse impact on earnings or returns. This concerns not only politically unstable countries, but also places where normal democratic procedures may bring about a change of government and thus a possible negative change in policy (e.g.: on tax, regulatory constraints; tariffs, etc.) (FT)

The risk of loss due to default on export credits arising from political causes, such as currency non-convertibility, expropriation of the obligor, government interference, war or revolution, etc. (GlossaryonTrade)

The risk of loss when investing in a given country caused by changes in a country’s political structure or policies, such as tax laws, tariffs, expropriation of assets, or restriction in repatriation of profits. For example, a company may suffer from such loss in the case of expropriation or tightened foreign exchange repatriation rules, or from increased credit risk if the government changes policies to make it difficult for the company to pay creditors. (Investorwords)

Political risks are associated with government actions which deny or restrict the right of an investor/owner (i) to use or benefit from his/her assets; or (ii) which reduce the value of the firm. Political risks include war, revolutions, government seizure of property and actions to restrict the movement of profits or other revenues from within a country. (MIGA)

The risk of nonpayment on an export contract or project due to action taken by the importer’s host government. Such action may include intervention to prevent transfer of payments, cancellation of a license, or events such as war, civil strife, revolution, and other disturbances that prevent the exporter from performing under the supply contract or the buyer from making payment. Sometimes physical disasters such as cyclones, floods, and earthquakes come under this heading. (OECD)

Any event occurring abroad which assumes the nature of force majeure for the insured or for the debtor, such as in particular, wars, revolutions, natural disasters, currency shortages, government action. (ONDD)

A type of risk faced by investors, corporations, and governments. It is a risk that can be understood and managed with proper aforethought and investment. (Wikipedia)

Perhaps you may be able to relate to one or more of these definitions. In any event, it appears that political risks are very real and something to be aware of.

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