Liga Asuransi – Dear readers, how are you? I hope your business is running well.
As always, this blog focuses on risk management and insurance; this time, we will discuss political risks and insurance.
In today’s fast-paced world, businesses face several political risks that can threaten their operations, investments, and profitability. Political risks arise from geopolitical tensions, government policy changes, and political instability. These unpredictable risks can occur suddenly, making them difficult to manage. That’s why companies must include political risks in their risk management strategy.
Political risks can significantly affect a company’s financial performance and reputation. Changes in government policies can lead to increased regulation, higher taxes, or reduced market access, which can reduce a company’s profitability.
Political instability and conflict can disrupt supply chains, damage property, and harm employees, damaging a company’s reputation and losing consumer trust. Secondly, political risks are unpredictable and can arise suddenly, making them difficult to manage.
Companies that fail to anticipate and prepare for political risks may face significant financial losses or legal liabilities. Companies can identify potential by including political risks in their risk management strategy.
POLITICAL INSURANCE
Political risk insurance is a specialized type of insurance designed to protect businesses from losses caused by political instability or events.
This type of insurance is becoming increasingly important in today’s globalized world, where political risks such as war, terrorism, expropriation, and currency inconvertibility are rising. Political risks can impact businesses in several ways, including disrupting supply chains, causing property damage or loss, and affecting profits.
The need for political risk insurance has become particularly acute for companies operating in emerging markets, where political instability and uncertainty are joint. In these markets, businesses may face risks such as arbitrary government action, civil unrest, and nationalization of assets.
Without insurance, these risks can be challenging to manage and threaten the business’s survival. Political risk insurance can help companies manage these risks and continue to operate even in the face of political turmoil.
To give you a better understanding, please read the following illustration.
“Once upon a time, a small manufacturing company called GreenTech had been doing well for many years. They had a solid customer base, good supply chains, and a dedicated workforce. However, the CEO of GreenTech, Tom, knew that their business was vulnerable to political risks.
They operated in a country with a history of instability, and Tom was worried that their operations could be disrupted by civil unrest or government action.
Tom decided to explore the option of political risk insurance, and after doing some research, he realized that it was exactly what his company needed. He contacted an insurance broker and began the process of obtaining coverage.
A few months later, a major political crisis hit the country, and many businesses were forced to shut down. However, because GreenTech had political risk insurance, they could continue operating even amid the turmoil. The insurance covered losses due to property damage, business interruption, and even the cost of evacuating employees if necessary.
Thanks to the insurance, GreenTech could weather the storm and come out stronger on the other side. Tom was grateful that he had decided to get political risk insurance, and he knew that it had been a wise investment for the future of his company.”
WHAT ARE THE SITUATIONS THAT ARE CONSIDERED AS POLITICAL RISKS?
Political risks are events or circumstances related to politics or political instability that can impact businesses, investments, or economic activities. These risks can arise from a variety of sources, including government actions, civil unrest, terrorism, war, or natural disasters that are exacerbated by political instability.
Some examples of political risks that businesses may face include:
- Expropriation or confiscation of assets by the government
- Currency inconvertibility or restrictions on foreign exchange
- Political violence, including terrorism, war, or civil unrest.
- Nationalization of key industries or infrastructure
- Changes in government policy or regulation that impact business operations.
- Breach of contract by the government or government entities
- Political instability, including changes in leadership or regime change.
- Embargoes, sanctions, or trade restrictions imposed by foreign governments.
These risks can have severe consequences for businesses, ranging from supply chain disruptions and property damage to loss of revenue and even bankruptcy. That’s why political risk insurance has become an essential tool for companies to manage these risks and protect themselves from the potential impact of political instability.
EXAMPLES OF POLITICAL RISKS CASES
In 2014, the Russian government expropriated the Russian oil company Yukos, which led to the company’s collapse and caused significant losses for investors.
During the Arab Spring in 2011, many companies operating in the Middle East faced business interruptions and property damage due to civil unrest and political instability.
In 2010, the Icelandic government-imposed capital controls that restricted the movement of currency, causing significant losses for foreign investors.
In 2008, the government of Argentina nationalized the country’s largest airline, Aerolineas Argentinas, causing losses for foreign investors.
In 1991, the collapse of the Soviet Union caused significant disruptions to many companies operating in the region, including Western businesses that had invested in the country.
In 1979, the Iranian Revolution led to nationalizing the country’s oil industry, causing significant losses for foreign investors.
In 1960, the government of Cuba expropriated the assets of many foreign companies operating in the country, including American businesses such as ExxonMobil and Coca-Cola.
These examples illustrate how political risks can significantly impact businesses and investors. Political risk insurance can help companies mitigate these risks and protect themselves from potential losses.
HOW POLITICAL RISK INSURANCE CAN HELP COMPANIES?
Political risk insurance can help companies manage the risks of operating in politically unstable environments and protect themselves from potential financial losses.
Political risk insurance can help companies in several ways:
- Protection against financial losses
Political risk insurance can cover losses due to events such as expropriation, nationalization, currency inconvertibility, and political violence. This protection can help companies mitigate the financial impact of political risks and avoid bankruptcy.
- Business continuity
Political risk insurance can help companies maintain business continuity in political instability. For example, if a company’s operations are disrupted due to civil unrest, the insurance can cover the costs of relocating employees or setting up alternative supply chains.
- Investment protection
Political risk insurance can provide security for foreign investors against the risks associated with investing in emerging markets. This can help encourage investment in these markets and support economic development.
- Risk assessment
Political risk insurance providers often have expertise in political risk assessment, which can be helpful for companies in identifying and mitigating potential risks before they become a problem.
- Access to financing
Some lenders require political risk insurance as a condition for financing in countries with high political risk. By obtaining insurance, companies can access funding that might otherwise be unavailable.
CONSIDERING FACTORS FOR INSURANCE COMPANIES TO ACCEPT POLITICAL RISKS
When considering whether to accept political risks, insurance companies will typically look at a range of factors, including:
- Country risk
Insurance companies will assess the overall risk level of the country where the company operates or invests. This will include political stability, economic growth, legal and regulatory environment, and social stability.
- Industry sector
Different industry sectors may face different political risks. For example, a company operating in the oil and gas industry may face more significant risks of expropriation or nationalization than a company in the technology sector.
- Company-specific risks
Insurance companies will also consider the specific risks the company faces, such as the location of its operations, the nature of its business, and its exposure to government contracts or regulations.
- Risk management practices
Insurance companies will assess the company’s risk management practices, including its policies and procedures for identifying and mitigating political risks.
- Financial strength
Insurance companies will assess the company’s financial strength, including its creditworthiness and ability to pay premiums and deductibles.
Based on these factors, insurance companies will determine whether to accept political risks and what level of coverage to offer. The premiums charged will be based on the level of risk, with higher-risk companies or countries generally paying higher premiums.
WHY DO COMPANIES NEED THE INSURANCE BROKER FOR THEIR INSURANCE?
Companies need the assistance of insurance brokers to arrange political risk insurance for several reasons:
- Specialized knowledge and expertise
Insurance brokers have specialized knowledge and expertise in the political risk insurance market. They can help companies navigate the complex landscape of policies, exclusions, and coverage options and advise on the best options for a company’s specific needs.
- Access to the market
Insurance brokers have established relationships with insurance providers that offer political risk insurance. This can give companies access to a broader range of options and help brokers negotiate better terms and pricing on behalf of their clients.
- Customized coverage
Insurance brokers can help companies customize their coverage to meet their specific needs. This may include tailoring coverage to specific country risks, industry sectors, or company-specific risks.
- Claims support
In the event of a claim, insurance brokers can provide valuable support and guidance to companies. They can help companies navigate the claims process, provide assistance in gathering the necessary documentation, and help ensure that claims are processed efficiently.
- Time savings
The process of arranging political risk insurance can be time-consuming and complex. Insurance brokers can help companies save time by handling much of the work in obtaining quotes, negotiating terms, and arranging coverage.
The assistance of insurance brokers can help companies obtain the right level of coverage for their specific political risk exposures and provide valuable support throughout the policy lifecycle, from initial placement to claims management.
One of the leading insurance brokers in Indonesia is L&G.
For all your insurance needs, please call L&G now!
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24-HOUR L&G HOTLINE: 0811-8507-773 (CALL – WHATSAPP – SMS)
website: lngrisk.co.id
E-mail: customer.support@lngrisk.co.id
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