Political risk insurance and guarantees

Political Risk Insurance/Guarantees (PRI) and Credit Guaranteesare financial instruments to mitigate political risks, like expropriation, breach of contract, currency inconvertibility, political violence and arbitration award default.

  • Political Risk Insurance can cover both equity investors and lenders against the default by a public or private entity caused by a political event. Coverage, generally limited to less than 100% of the investment, pricing, tenor and eligibility vary widely and depend on the projects risk level. Providers of PRI cover include bilateral agencies, like Export Credit Agencies and EXIM banks, multilateral agencies and private insurance companies.
  • Political Risk Guarantees typically cover the full amount of debt owed to commercial lenders in private projects if the debt default is caused by political risks specified under the guarantee. In general covered political events are widely defined and may even include force majeure events.
    The most common examples are Partial risk guarantees (PRGs) offered by multilateral development banks and a few bilateral agencies. These guarantees can cover up to 100% of debt service (principal and interest). PRGs generally require that the government provide a counter-guarantee or indemnity.
  • Credit Guarantees are comprehensive instruments as they cover losses in the event of a debt service default with no differentiation of commercial or political causes. Credit guarantees can be classified into two types:
    • Full Credit Guarantees or Wrap Guarantees cover the entire amount of the debt service in the event of a default. They are often used by bond issuers to achieve a higher credit rating to meet the investment requirements of institutional investors. Until the global financial crisis in 2007/08, private monoline insurers issued wrap guarantees for bonds issued by infrastructure project companies in the ASEAN region.
    • Partial Credit Guarantees (PCGs) cover part of the debt service of a debt instrument regardless of the cause of default. PCGs ease the borrower’s access to financing by reducing interest rates and/or increasing the tenor. PCGs typically cover debt service for late maturities, which may be beneficial when lenders are not willing or able to provide a financing tenor long enough to match the cash flow of a project. Alternatively, PCGs can cover a portion of principal and interest payments payable throughout the term of a borrowing. PCGs are increasingly used by subnational entities and private companies to borrow from commercial banks or to issue bonds.

    Political risk insurance and guaranteesenable investors and lenders to transfer political risks to a third-party. As these instruments, different to other RMIs, are tradable, the market for PRI is discussed in more detail:

    • Usage of Political Risk Insurance and Guarantees in Southeast Asia (For details see here)
    • Demand for PRI for infrastructure investment in Southeast Asian countries (For details see here)
    • Supply of political risk insurance and guarantees from public and private agencies (For details see here)
    • Constraints in accessing PRI cover (For details see here)