Financial institutions engaged in cross-border lending are often hindered in pursuing similar transactions by limit restrictions to country exposure mandated by regulatory agencies or internal bank guidelines. In addition, international events affecting the repayment of underlying loans can occur without warning, leading to potential losses in the portfolio and negatively impacting the profitability of a lender?s portfolio of assets.

Examples of political risk events can include:

• the freezing of bank deposits by the host government, thereby preventing the corporate borrower from repayment of debt
• inability to convert local currency into hard currency
• inability to transfer funds from the host country following the implementation of host government restrictions

There are also the repayment risks faced by lenders following the expropriation of a borrower?s investment in a project or their assets in the host country. These risks can take the form of outright confiscation of the borrower?s property or investments by the government. However, what more commonly occurs is "creeping expropriation" which can include a series of discriminatory actions by the host government. These actions can derail a project, making it difficult for the borrower to repay its debt obligations.

Political violence in the host country, such as terrorism, sabotage, war, and civil strife, may be the direct and immediate cause of a payment default. The assets of the overseas enterprise may be damaged to the extent that it is forced to halt operations until the assets are either repaired or replaced, thereby preventing the borrower from meeting its scheduled debt payments. A critical supply link may also be affected by political violence.

In addition to traditional insurance for project loans, coverage can also be obtained for financial leases, future flow transactions or other financial contracts. In recent years, the political risk insurance market has evolved to develop products that address issues relating to the credit enhancement of bond placements in the capital markets.

Political risk insurance can minimize the risks presented by the unanticipated events identified above. The Political Risk practice has been placing political risk coverage for decades, and has market-leading expertise in matching the most suitable insurance cover with our clients' risk concerns.