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Political Risk Insurance: Financial Coverage for Politicians’ Unpredictable Decisions in Multinational Businesses

The Political Risk Insurance (PRI) market provides coverage to businesses and investors against financial losses resulting from political events or instability in a host country.

January 14, 2025 • Estimated Reading Time: 13 minutes

In this article

Market Definition

The Political Risk Insurance (PRI) market provides coverage to businesses and investors against financial losses resulting from political events or instability in a host country. These events include expropriation, political violence, breach of contract, currency inconvertibility, and more. As companies increasingly venture into emerging and volatile markets, the demand for PRI has grown, making it an essential tool for mitigating risks associated with political uncertainties. The market serves a broad spectrum of clients, including multinational corporations, investors, exporters, and lenders.

The Political Risk Insurance (PRI) market has become a critical component for global investors and businesses looking to safeguard their investments against unpredictable political and economic risks. As companies expand into emerging markets with volatile political environments, the need for comprehensive insurance policies that mitigate risks such as expropriation, currency inconvertibility, civil unrest, and regulatory changes is rapidly increasing.

Simplified Deal Structuring

Market Structure: Providers of Political Risk Insurance

The PRI market is segmented into three primary provider categories:

  • Multilateral Insurers

These include organizations like the Multilateral Investment Guarantee Agency (MIGA) under the World Bank Group, the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), and the African Trade Insurance Agency (ATI). These providers play a vital role in promoting sustainable investments in developing countries by offering guarantees and fostering investor confidence.

  • National Export Credit Agencies (ECAs) and Bilateral Development Banks

Operated by governments, ECAs and bilateral banks like the U.S. Export-Import Bank and the UK Export Finance agency support cross-border trade and investment by providing PRI coverage. These institutions primarily serve domestic businesses and investors entering foreign markets.

  • Private Insurers and Reinsurers

A growing number of private insurers, including syndicates under Lloyd’s of London, Bermuda-based insurers, and companies in the U.S., offer PRI policies. Reinsurance giants like Munich Re and Swiss Re also support the PRI market, influencing pricing and underwriting capacity.

Types of Coverage

The PRI market offers a range of policies, including:

  • Expropriation: Protects against government seizure of assets.

  • Political Violence: Covers damages caused by war, terrorism, or civil unrest.

  • Currency Inconvertibility: Insures against the inability to convert or transfer funds.

  • Breach of Contract: Covers losses from government failures to honor contractual agreements.

PRI policies are evolving to become more customized and flexible, catering to the unique needs of specific industries and geographic regions. Additionally, advancements in technology, such as digital platforms, are streamlining access to PRI products, enhancing market efficiency and transparency. A surge in demand from private investors and new market entrants further highlights the growing specialization and dynamism within the PRI sector.

Increasing Demand

The PRI market has experienced significant growth over the past decade, driven by rising geopolitical tensions and the growing presence of businesses in high-risk regions. According to Berne Union data, the stock of PRI coverage expanded from USD 184.7 billion in 2010 to USD 317 billion in 2018. This growth reflects the heightened need for risk mitigation in an increasingly interconnected and volatile global economy.

Impact of Global Events

Major global events, such as the COVID-19 pandemic, the Russia-Ukraine conflict, and climate change, have amplified the perception of political risks. The pandemic disrupted supply chains, depressed global FDI, and exposed vulnerabilities in political and economic systems, reinforcing the necessity of PRI for multinational corporations and investors. Additionally, ongoing geopolitical conflicts have created uncertainty in regions critical to global trade and investment.

Climate and Energy Transition Risks

The shift toward low-emission energy systems and climate change adaptation introduces new political risks, especially in commodity-dependent economies. Governments in these regions may face instability due to transitions in energy policies, regulatory changes, and shifting investor priorities. As a result, demand for specialized PRI coverage addressing climate-related risks is expected to rise.

Coverage Gaps

Despite the expansion of the PRI market, a significant gap remains in coverage for Foreign Direct Investment (FDI). Research indicates that only 1-5% of FDI flows into developing countries are currently insured against political risks. This presents a substantial opportunity for market growth, particularly in regions with limited insurance penetration and high investment risk.

Drivers of Market Growth

  1. Emerging Market Expansion

Companies are increasingly entering emerging markets in search of growth opportunities, which often come with elevated political risks. The PRI market plays a pivotal role in facilitating these investments by offering financial security against potential losses from political instability.

  1. Sector-Specific Vulnerabilities

Sectors such as financial services and industrials are particularly exposed to political risks due to their reliance on global operations, complex supply chains, and heavy infrastructure investments. For example, financial services face risks from shifting regulations and sanctions, while industrial firms grapple with supply chain disruptions and trade policy changes.

  1. Technological Advancements

Digital platforms and data analytics are transforming the PRI market, enabling insurers to assess risks more accurately, design tailored policies, and improve claims processing. These technological advancements enhance the accessibility and efficiency of PRI products, attracting a broader range of clients.

Most Common PRI Perils

According to Marsh, the most common Political Risk Insurance (PRI) perils for international businesses, including property perils and asset confiscation/expropriation as the top risks. Other notable risks are accounts receivables, license revocation, and inability to repatriate dividends or loan repayments.

Most Exposed Sectors to Political Risks

Top 3 most Exposed sectors to Political Risks are the Financial Sector, Industrials and Real Estate. The first 2 suffer the most of Political instability, since are components of a country`s economy, and are often target of high political direction changes costs and wealth transfer.

Financial services and industrial sectors are particularly susceptible to political risks due to several factors:

Financial Services Sector:

  • Regulatory Environment: Financial institutions operate under stringent regulations that can change with shifting political landscapes. Alterations in policies, such as sanctions or trade restrictions, can directly impact operations and profitability. 

  • Global Operations: Many financial firms have a global presence, exposing them to diverse political climates. Geopolitical tensions, such as those between the US and China, can affect cross-border transactions and market access. 

  • Market Sensitivity: Financial markets are highly sensitive to political events. Elections, policy changes, or geopolitical conflicts can lead to market volatility, affecting asset values and investment strategies. 

Industrial Sector:

  • Supply Chain Dependencies: Industrial companies often rely on complex, international supply chains. Political instability in supplier countries can disrupt production and increase costs. 

  • Infrastructure Investments: Significant capital investments in infrastructure make industrial firms vulnerable to expropriation or unfavorable policy changes in host countries. Political decisions can alter the viability of these investments. 

  • Trade Policies: Industrial firms are heavily impacted by trade policies, tariffs, and sanctions. Political shifts leading to protectionism or trade wars can hinder market access and competitiveness. 

In both sectors, the interconnectedness of global operations and the influence of government policies heighten exposure to political risks, necessitating robust risk management strategies.

The Financial Impact of PRI

Political Risk Insurance (PRI) plans play a crucial role in mitigating the discount rate associated with country risk, offering strategic coverage that significantly enhances the valuation and return rates of investment projects. These plans are particularly effective in improving the financial feasibility of investments in emerging markets.

A study by Marsh and S&P Global highlights the transformative impact of PRI in three key emerging markets—Ghana, Brazil, and Indonesia—focusing on Energy Development Programs. By comparing the Net Present Value (NPV) and Internal Rate of Return (IRR) adjusted for country risk before and after PRI implementation, the study underscores the tangible benefits of PRI coverage.

The implementation of PRI led to a substantial reduction in country premium risks:

  • Ghana: -4.07%

  • Brazil: -1.50%

  • Indonesia: -0.79%

These reductions have a direct positive effect on investment attractiveness and project viability. Additionally, the improved risk profile has contributed to enhanced credit ratings from leading agencies such as Moody's, S&P, and Fitch, further solidifying the financial credibility of these markets post-PRI implementation.

Political Risk Insurance provide higher valuations and financial health for an investment project in unstable countries, highly exposed to political changes, revolutions, changes in property rights and regulations.

Key Countries for PRI Adoption

Key countries for PRI adoption are those that combine considerably high Risk Premiums and High Inward Stock of Foreign Direct Investment (FDI), since they represent significant opportunities for mitigating investment risks while protecting large-scale foreign capital inflows. In such countries, high risk premiums often deter potential investors, and PRI can serve as a critical tool to bridge the gap by reducing perceived risks, improving project viability, and fostering investor confidence. Additionally, these countries often have strategic sectors, such as energy, infrastructure, or mining, that rely heavily on FDI, making PRI essential for ensuring the continuity and success of large, long-term investment projects.

Most FDI Dependent Countries

Most Foreign Direct Investment (FDI) dependent countries are Singapore, Belgium, and the United Kingdom, which exhibit exceptionally high FDI inward stock as a percentage of gross capital formation. FDI inward stock as a percentage of gross capital formation is a metric that measures the extent to which a country's investment in new capital—such as buildings, infrastructure, machinery, and equipment—is financed by Foreign Direct Investment (FDI).

These nations are vital in the context of Political Risk Insurance (PRI) as their economies heavily rely on foreign capital inflows to sustain growth and development. For such countries, PRI is a critical tool to attract and retain FDI by mitigating risks associated with geopolitical instability, regulatory changes, and economic volatility, ensuring the stability of investments in these highly interconnected markets.

Sources & References

ICIEC. (n/d). The State of Political Risk Insurance. https://iciec.isdb.org/insights/the-state-of-political-risk-insurance/ 

Macrotrends. (2023). Foreign Direct Investment by Country. https://www.macrotrends.net/global-metrics/countries/ranking/foreign-direct-investment 

Marsh. (2024). Political Risk Report 2024.

Marsh. (2014). Political Risk Insurance: Protection of Investments.

Mars. S&P Global. (2022). A new perspective on the cost and benefits of political risk insurance for foreign direct investments.

Prewave. (2024). How Political Tensions Influence Global Manufacturing Hubs: Navigating Supply Chain Risks. https://www.prewave.com/blog/how-political-tensions-influence-global-manufacturing-hubs-navigating-supply-chain-risks/?utm 

S&P Global. (2024). Power Plays in 2025: Economics, geopolitical risk, trade and supply chain. https://pages.marketintelligence.spglobal.com/rs/565-BDO-100/images/MI_PDF_GIA_Power_Plays_in_2025.pdf?version=0 

The Insurance Universe. (2024). Understanding the Types of Political Risk Coverage Explained. https://theinsuranceuniverse.com/types-of-political-risk-coverage/ 

The Insurance Universe. (2024). Understanding Political Risk Insurance: Safeguarding Investments. https://theinsuranceuniverse.com/political-risk-insurance/ 

UN Trade Database. (2025). Foreign direct investment: Inward and outward flows and stock, annual. https://unctadstat.unctad.org/datacentre/dataviewer/US.FdiFlowsStock 

World Bank. (2024). Political risk insurance in a shifting landscape for foreign direct investment. https://blogs.worldbank.org/en/voices/political-risk-insurance-in-a-shifting-landscape-for-foreign-direct-investment 

WTW. (2024). Credit and Political Risk Insurance Capacity Survey and Market Update. 

WTW. (2023). Managing the new political risks in manufacturing.