Political Risk Insurance. A Technical Approach.

This paper analyses the impact of political events and how each specific event, such as expropriation, transfer restrictions, war and civil disturbance and breach of contract, has different impacts in terms of loss, compensation and recovery both from an equity and credit coverage perspective.
This paper also focuses on risk assessment methodology: based on a comprehensive approach, some PRI providers adjust “country political risk” ratings according to project-specific factors. This results in an indication of the likelihood of an event occurring in relation to a single insured project. The main aspects driving the analysis range from economic fundamentals to political instability, as well as institutional and legal framework of the host country. One of the conclusions is that the political risks are not independent dimensions but there is a high correlation among themselves.
Finally, one of the most thorny issues for PRI providers is how to price political risks as statistical and actuarial calculations are of little help with this kind of events. Different approaches have been followed by PRI providers and there is no common playing field as in the case of OECD rules on credit risk. Ultimately it is not even granted that insurers actually charge premia that adequately remunerate risk.