Political Risk Insurance: Protecting International Construction Projects
Essential coverage for contractors operating in emerging markets where government actions can threaten project viability.
Key Takeaways
- PRI covers expropriation, political violence, currency inconvertibility, and contract frustration
- MIGA and ECAs provide capacity and credibility; private markets offer flexibility
- Coverage should be structured early—ideally during project development phase
- Pricing varies significantly by country, tenor, and coverage scope (0.3% to 3%+ annually)
- Claims documentation is critical—maintain thorough records from day one
What is Political Risk Insurance?
Political Risk Insurance (PRI) protects investors and contractors against losses arising from political events in host countries. Unlike commercial risks that result from business decisions, political risks stem from government actions—or failures to act—that adversely affect foreign investments.
For international construction projects, PRI is often essential. Even stable countries can experience political changes that affect foreign contractors. In emerging markets, the risk is more acute—new governments may not honor predecessor commitments, economic crises can trigger currency controls, and political instability can halt projects entirely.
What Does PRI Cover?
Expropriation
Protects against government seizure of assets, nationalization, or "creeping expropriation" through regulatory actions that effectively deprive you of your investment.
Political Violence
Covers physical damage and business interruption from war, civil war, insurrection, revolution, terrorism, and civil disturbance.
Currency Inconvertibility
Protects when you cannot convert local currency to hard currency or transfer funds out of the host country due to government actions.
Contract Frustration
Covers losses when a government entity breaches or repudiates a contract, or when government actions prevent contract performance.
Arbitration Award Default
Protects when a host government or state-owned entity fails to honor an arbitration award in your favor.
Non-Honoring of Sovereign Guarantee
Covers losses when a government fails to honor a sovereign guarantee provided for a project.
PRI Providers
Political risk insurance is available from several sources, each with different strengths:
MIGA (World Bank Group)
MultilateralGlobal credibility, deterrent effect on host governments, long tenors (up to 20 years)
Lengthy application process, development mandate requirements, no coverage for home country
OPIC/DFC (USA)
Bilateral ECAStrong US government backing, competitive pricing, good claims payment history
Only for US investors/contractors, development priorities, some country restrictions
SINOSURE (China)
Bilateral ECAEssential for Chinese contractors, integrated with Chinese financing, local expertise
Primarily for Chinese entities, can be bureaucratic, limited transparency
Lloyd's of London
Private MarketFlexibility, speed, creative structuring, no development mandate
Typically shorter tenors (3-7 years), higher pricing, capacity constraints for large risks
AIG/Zurich/Chubb
Private MarketLarge capacity, global presence, integrated with other coverages
Pricing can be high, may withdraw from certain markets
Berne Union ECAs
Various National ECAsCountry-specific expertise, often competitive pricing, government backing
Tied to national interest, varying terms, can be slow
MIGA: The Gold Standard
The Multilateral Investment Guarantee Agency (MIGA), part of the World Bank Group, is often the preferred PRI provider for large infrastructure projects. Key advantages:
- Deterrent Effect: Host governments are reluctant to take actions that would trigger MIGA claims, damaging their World Bank relationship
- Long Tenors: Coverage available for up to 20 years—critical for infrastructure concessions
- Credibility: MIGA involvement signals project quality to other investors and lenders
- Dispute Resolution: MIGA can mediate disputes before they become claims
MIGA Application Process
MIGA applications require detailed project information including financial projections, development impact assessment, and environmental/social review. Expect 3-6 months for underwriting. Engage early—ideally during project financing discussions.
Real-World Claims
Understanding how claims have played out provides insight into coverage value:
Expropriation of Power Plant
VenezuelaGovernment nationalized a power generation facility owned by international consortium.
Expropriation coverage under MIGA guarantee
MIGA paid claim after confirming expropriation. Pursued subrogation against government.
MIGA deterrent effect failed here, but coverage worked. Long tenor critical for infrastructure.
Contract Frustration - Highway Concession
IndonesiaGovernment changed toll rate regulations after concession was operational, making project uneconomic.
Contract frustration and breach of undertaking
Negotiated settlement with government after PRI claim was filed. Insurer supported negotiation.
PRI can leverage negotiations even before formal claim. Regulatory risk is real.
Political Violence - Construction Site
LibyaCivil war led to evacuation of site and destruction of construction works.
Political violence and forced abandonment
Claim paid for physical damage and costs of abandonment. Project eventually cancelled.
Political violence coverage critical in unstable regions. Include forced abandonment.
Currency Inconvertibility
NigeriaGovernment imposed exchange controls preventing conversion of naira profits to dollars.
Currency inconvertibility and transfer restriction
Insurer paid in dollars; retained right to local currency when convertibility restored.
Currency risk real in commodity-dependent economies. Include waiting period carefully.
Pricing Considerations
PRI pricing varies significantly based on multiple factors:
| Factor | Impact on Pricing |
|---|---|
| Country Risk | Primary driver—rates vary 0.3% to 3%+ of insured value depending on country rating |
| Tenor | Longer coverage periods = higher rates; 15-year tenor may be 2x 5-year rate |
| Coverage Scope | Comprehensive coverage (all perils) costs 40-60% more than single-peril |
| Insured Value | Larger limits can achieve economies of scale; small limits may face minimum premiums |
| Sector | Extractive industries and utilities face higher rates than manufacturing |
| Investor Nationality | Some countries are more politically sensitive to certain investor nationalities |
| Existing Coverage | Layering with ECAs or MIGA can reduce private market pricing |
| Claims History | Both investor and country claims history affect pricing |
Structuring Your Coverage
Coverage Amount
PRI can cover:
- Equity Investment: Your capital contribution to the project
- Shareholder Loans: Loans from investors to the project company
- Retained Earnings: Profits reinvested in the project
- Interest and Dividends: Expected returns (more limited coverage)
Most policies cover "book value" or "fair market value"—understand the difference and its implications for your recovery.
Waiting Periods
PRI policies typically include waiting periods before claims can be filed:
- Currency Inconvertibility: 60-180 days of inability to convert
- Expropriation: 90-365 days depending on type
- Political Violence: Often no waiting period for physical damage
Denial of Claims
PRI claims can be denied for failure to follow policy conditions—particularly notification requirements and documentation obligations. Maintain a "claims file" from project inception documenting all government interactions, regulatory changes, and potential issues.
Integrating with Project Finance
For project-financed infrastructure, PRI fits into the broader risk allocation:
- Lender Requirements: Project lenders often require PRI as a condition of financing
- Assignment: PRI can be assigned to lenders as additional security
- Coordination: Ensure PRI terms align with loan agreement definitions
- Claims Proceeds: Define how claim proceeds flow—to lenders first, then equity?
Best Practices
- Start Early: Begin PRI discussions during project development. Late applications may face limited capacity or higher pricing.
- Layer Coverage: Combine MIGA or ECAs with private market capacity. Multilaterals provide credibility; private markets provide flexibility.
- Monitor Continuously: Political risk is dynamic. Maintain ongoing country risk monitoring and communicate changes to insurers.
- Document Everything: Maintain comprehensive records of all government interactions, permits, and regulatory communications.
- Understand Exclusions: Know what is NOT covered—commercial risk, your own defaults, events known at inception.
- Build Relationships: Cultivate relationships with host government officials and diplomatic channels. Prevention is better than claims.
Need Political Risk Coverage?
Our advisors have extensive experience structuring political risk insurance for international construction projects. We can help you navigate MIGA, ECAs, and private markets to build appropriate protection.