In addition to the underlying credit risk in every trade transaction, companies who contract with either foreign governments or private entities located abroad, for either the purchase or supply of goods or services, often face a number of political risks that threaten the profitability of the transaction. Events to forestall the fulfillment of a contract agreement can occur before or after shipment or delivery of the contracted goods, and before, during, or after completion of the contracted services. Among the more common types of prevailing risks are the following events:
Contract Frustration prior to the shipment or delivery of goods:
- Unilateral contract cancellation by the other party to the agreement, where the party is a government entity.
- Cancellation of legally granted import or export licenses, or implementation of laws preventing import or export of goods.
- Outbreak of a new war or civil war preventing the contract from being completed.
Contract Frustration after shipment or delivery of goods:
- Payment default by a buyer that is a government entity.
- Failure of the government foreign exchange authority to transfer the transaction amount in the contract currency to the exporter, although the private local buyer has deposited the agreed upon payment in equivalent local currency with the foreign exchange authority.
- Where contract disputes have arisen, a government buyer or bank not honoring an arbitration judgment in favor of the exporter in accordance with the arbitration procedure outlined in the transaction contract.
Insurance can indemnify the client for loss of the following:
- Costs incurred before contract termination or cancellation.
- Penalty fees due the supplier as a result of early termination of sub-contracts caused by politically motivated events.
- An allowance, usually 10%, of the net loss of profit.
- After contract termination, the amount unpaid by the government buyer or bank.
Insurance coverages can be obtained for terms up to five years for contracts with private buyers, and up to ten years for contracts with government obligors providing a sovereign guarantee for the contract. Claim settlement occurs after the conclusion of a "waiting period."
Political Risk insurance can minimize the risks presented by the unanticipated events identified above or others. The Political Risk Practice, a part of Marsh Crisis Consulting, has been placing political risk coverage for decades, and has market-leading expertise in matching the most suitable insurance cover with our client's risk concerns.