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Political Risk Credit Insurance
By Michael C. Dennis, and Steven Kozack

International Credit Articles
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Consider additional insurance for international accounts receivable

Export credit insurance, also known as business credit insurance, or accounts receivable insurance, is a specialized form of insurance that protects your company against bad debt due to insolvency, and/or protracted default, and/or political risk.

Companies considering purchasing export credit insurance need to consider whether or not to purchase political risk coverage. Political risk credit insurance policies cover:

  • Currency restrictions that may take the form of new more restrictive foreign exchange regulations.

  • Expropriation, nationalization, or confiscation of the buyer's business without compensation by the buyer's government.

  • Newly imposed import restrictions that cancel valid import licenses.

  • Political risk coverage protects against the buyer's inability to transfer money out of the buyer's country because of changes in government regulations

  • The buyer's default on its obligations under an arbitration award or court decision made in favor of the exporter.

  • The enactment of any law, order, embargo, by the buyer's country that prevents the buyer from fulfilling its obligations under the contract [sometimes referred to as contract frustration].

  • Transfer risk, which is the inability of the buyer to transfer currency out of its country.

  • War, or damage caused by war or any other disturbance within the buyer's country.

There are several notes of caution about this type of insurance policy, including:

  • Credit professionals must carefully read the policy's terms and conditions, as well as the exclusions and limitations to understand the benefits and limitations of the policy under review.

  • Exclusions typically include losses caused by war, and civil unrest.

  • Not all political risk insurance policies cover all of these risks

  • Political risk coverage does not protect the seller against the devaluation of the buyer's currency.

  • There may be specific limitations and restrictions when a policy covers political risk

Creditors should consider purchasing both credit risk and political risk export insurance coverage when selling to companies in regions that have a history of political instability, government coups, radical changes in fiscal and monetary policy, as well as countries whose currency takes wild swings in the foreign exchange markets, or countries considered high risk by the international investment community.

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