Political Risk Insurance

Political Risk Insurance: What UK Businesses Investing Overseas Should Know

UK businesses are increasingly looking beyond their domestic markets for growth. Whether through energy projects, infrastructure investments, or joint ventures in emerging markets, international expansion can present significant commercial opportunities.

However, overseas investment also introduces political risk, events arising from government actions or political instability that may affect the viability of a project.

Political Risk Insurance (PRI) is a key tool used by investors and lenders to manage these risks when operating internationally.

What is Political Risk Insurance?
PRI protects investors and lenders against losses caused by political events or government actions in the country where the investment is made.

It is particularly common in sectors involving large capital investment and long-term projects, including:

• Energy and natural resources;
• Infrastructure and construction; and
• Telecommunications.

Coverage is typically provided by specialist insurers, export credit agencies, and multilateral institutions such as development banks.

For UK businesses participating in international projects, PRI can play an important role in protecting investment value.

Key Risks Covered

Although policies vary, most PRI policies cover several core categories of risk:

Expropriation or Nationalisation

One of the most significant political risks is the possibility that a government seizes, nationalises, or otherwise interferes with privately owned assets.

This may occur through direct nationalisation or through regulatory measures that effectively deprive investors of control or economic benefit from their investment.

A well-known example occurred in Venezuela during the 2000s, when the government nationalised several foreign-owned oil projects by enforcing majority state ownership over foreign-operated projects, especially in the Orinoco Belt. A number of international energy companies saw their assets taken over by the state, leading to lengthy arbitration claims and substantial financial losses.

Political Violence

PRI may cover losses caused by war, civil unrest, terrorism, or other politically motivated violence that damages assets or disrupts operations. In regions experiencing conflict or instability, such events can significantly disrupt projects or supply chains.

For example, businesses operating in Ukraine following the Russian invasion in 2022 faced severe disruption to infrastructure and operations. This prompted increased demand for PRI among investors involved in reconstruction and infrastructure projects.

Currency Inconvertibility and Transfer Restrictions

Governments may impose restrictions preventing investors from converting local currency into foreign currency or transferring funds abroad. This can affect a company’s ability to repatriate profits, service debt, or recover investment returns. PRI may cover losses arising from such restrictions.

Recent examples of transfer restrictions include Argentina’s foreign exchange controls during its financial crises, Lebanon’s banking restrictions following the 2019 financial collapse, and Russia’s capital controls following sanctions imposed in 2022.

Breach of Contract by State Entities

Where a government or state-owned entity is a contractual counterparty, for example in infrastructure concessions or energy projects, PRI may provide protection if the state fails to honour contractual commitments.

This risk can arise where governments seek to renegotiate concessions, alter regulatory frameworks, or terminate agreements for political reasons.

Real-world examples of disputes involving state counterparties include Spain’s reduction of renewable energy subsidies following the 2008 financial crisis and the long-running dispute surrounding the Dabhol power project in India, where a state electricity authority refused to honour a power purchase agreement.

Why Political Risk Insurance Matters for Scottish Businesses

For UK companies expanding internationally, PRI can provide several strategic advantages.

Supporting International Investment

PRI helps protect significant capital investments, particularly where projects require substantial upfront funding.

This can make businesses more comfortable when they are pursuing opportunities in jurisdictions that might otherwise be considered too risky.

Facilitating Project Financing

In many cross-border transactions, lenders will require PRI as a condition of financing, particularly in emerging markets.

By reducing exposure to political events, PRI can help unlock financing that might otherwise be unavailable.

Enhancing Risk Management

For companies investing overseas, PRI forms part of a broader risk management strategy, alongside contractual protections and investment structuring.

The Role of Legal Structuring

From a legal perspective, PRI is typically considered alongside other mechanisms designed to protect international investments.

These may include:

• Structuring investments through appropriate holding companies;
• Including international arbitration clauses in contracts with state entities;
• Relying on protections available under bilateral investment treaties; or
• Negotiating stabilisation provisions in long-term concession agreements.

Early legal input is often important to ensure that the structure of the investment aligns with available insurance coverage and treaty protections.

Practical Takeaways for Businesses Investing Overseas

For UK businesses considering international investment, political risk should be assessed early as part of the overall transaction planning process. In practice, this means:

Assessing political risk at the outset
Before committing capital, businesses should evaluate the political and regulatory stability of the jurisdiction in which they plan to operate. This is particularly important for projects involving significant long-term investment.

Considering political risk insurance early
PRI is often easier and more cost-effective to obtain when it is considered at an early stage of the investment or financing process.

Structuring investments carefully
Investment structures can affect the availability of treaty protections and insurance coverage. Early legal and tax advice can help ensure the structure supports risk mitigation strategies.

Ensuring robust contractual protections
Where projects involve government entities or state-owned companies, contracts should include appropriate dispute resolution mechanisms, including international arbitration provisions where appropriate.

Aligning insurance with contractual protections
Political risk insurance works best as part of a broader risk management framework alongside contractual protections, treaty protections, and careful investment structuring.

Final Thoughts

International expansion offers significant opportunities for UK businesses, particularly in sectors where there is strong domestic expertise, such as energy, infrastructure and technology.

However, political and regulatory risks can have a significant impact on overseas investments. Political risk insurance can provide an additional layer of protection which helps businesses manage uncertainty while continuing to pursue international growth.

For companies that are considering making an investment in overseas markets, understanding how PRI interacts with contractual protections and investment structuring is an important part of managing long-term risk.

Morgen Opala
Solicitor, Corporate
Phone:01382 202 444 
Email: Mopala@gilsongray.co.uk 

The information and opinions contained in this blog are for information only.  They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice.  Before acting on any information contained in this blog, please seek solicitor’s advice from Gilson Gray.