Political Risk Insurance
There's no shortage of consumer-based insurance options. From medical insurance to homeowners insurance policies, all the way to advanced disability insurance and vehicle insurance services, the consumer insurance industry has built hundreds of worthwhile services. While it can often seem to be somewhat overwhelming in its size and scale, it's nothing next to the business insurance industry.
From liability insurance to currency and trade credit insurance, the lucrative world of business and enterprise insurance services is one of the world's most valuable. Companies that the general public barely knows about are multi-billion dollar giants, offering an array of essential services to some of the world's largest and most financially successful international companies and major businesses.
At the same time, these insurers offer protection for small businesses and medium-sized enterprises, protecting them from surprising changes in currency value or political changes. One service that's of incredible value to many of these companies is political risk insurance – a unique form of insurance that protects businesses from the direct and side effects of political changes, revolutions, and coups.
Sound a little volatile? You thought right. While political risk insurance falls far outside the interests of most consumers, it's an essential consideration for businesses. Major political changes, either to a company's tax system or regulatory standards, can cause massive issues for many businesses. For an overseas or otherwise expatriated business, these can often become very intrusive in their nature.
Take, for example, a complete change in government prompted by political violence or a revolution within a country. This 'impossible' scenario has been a reality for the business owners of many large countries, including Argentina and Thailand. Businesses that generate large amounts of revenue can find themselves unable to properly work with a government due to sudden changes and new rules.
In a volatile political environment, this can often change a company's revenue statement from being 'in the black' to working almost entirely at a loss. Business can be interrupted due to sudden changes in policy; employees may need to be terminated due to new hiring or immigration laws, and private business dealings backed up by contracts may no longer become legally binding and of any value.
In these cases, it's difficult for a business to operate as usual. It's difficult for a business to operate in any sense in cases of dire and sudden political change, making political risk insurance an important security asset for some. In simple terms, political risk insurance offers protection from the fallout a sudden change in government, a coup, or another political event could cause for a private business.
Here's a simple example of how political risk insurance could assist a multinational company in its operations. If a company is split between two countries, in this case the United States and Panama, its income and expenditure will need to be managed using one of two bank accounts. Its taxes and other public obligations are also going to need to be managed throughout two company entities.
If the funds become locked into one account – unable to be converted into another currency due to government policies or other changes in business operation – its entire business plan could become an impossibility. Its funds could be locked into one account due to changes in an export and foreign ownership agreement, and its cash flow could be ceased due to an account becoming unavailable.
That's obviously not a situation that many businesses would like to be an, especially those that have ambitious targets to achieve and revolutionary products to launch. When a government changes in a way that pushes a benefit away from being viable, political risk insurance can help push it towards a profitable outcome by reimbursing a certain amount of its protective policy value.
In this way, political risk insurance policies are similar to disability protection policies, which offer a specific amount of income protection for employees and businesses. The difference is that, in this case, it's not the individual that's been injured but the business model. Due to a sudden change in the way businesses operate, what was once a profitable and usable business is no longer able to work.
Insurance companies can, depending on the severity of the political risk and situation, offer back a portion of the total policy's value to the business. A political risk insurance policy that's taken out to protect a business from the risk of their revenues being affected by corruption or inner government issues could provide coverage for losses due to contract nullification or public issues, for example.
Similarly, a political risk insurance policy that protects a foreign company from a coup or complete government revolution could compensate a business in the event of its profits falling as a country's ruling party is pushed out suddenly. It could also offer compensation when a complete change in a country's government affects the ability of a business to operate as it typically has in the past.
With globalization now at the forefront of business, and even small companies investing in foreign staff and international assistance, the value of a competitive and adequately structured political risk insurance policy has increased dramatically. For companies that depend on overseas staff or offices in other countries, a political risk insurance policy is, in many ways, a necessity for stable income.
It's also an important asset for businesses that report and pay taxes in multiple domains, either due to their operating structure or as part of a more complex tax scheme. With many companies using a foreign office to eliminate or minimize their tax obligations, the value of political risk insurance is quite clear. It can, in some cases, be the difference between stable tax dealings and complications.
Political risk insurance is a fairly inexpensive form of insurance that's passed over far too frequently by businesses engaged in international operations. A variety of major insurance companies offer the service to small and medium sized businesses, allowing almost any company based in two or more countries to control its exposure to risk and eliminate unwanted political business interruptions.