Political risk insurance is a useful though underutilised risk-mitigation tool, especially for investors in emerging markets, says Edith Quintrell.
The world economy is changing dramatically and we are experiencing a shift in the distribution of growth toward emerging markets and developing economies. As these countries become the key drivers of global economic growth, foreign investors are understandably looking at developing countries as investment destinations. After a precipitous drop resulting from the global financial crisis, the World Bank forecasts a 17 percent increase in foreign direct investment (FDI) into developing countries for 2010.
A long-term commitment to an investment also means a long-term commitment to the host country. And although investors are generally optimistic about financial returns in developing economies, a recent study by the World Bank’s Multilateral Investment Guarantee Agency (MIGA) found that the top worry for multinational executives when operating in these countries over the next three years is political risk.
In fact, political risk tops business concerns such as market size, lack of finance and quality of infrastructure. Corporate decision-makers remain most concerned about government interventions that adversely affect the financial viability of their investment, such as changes in regulation, breach of contract, expropriation and restrictions in currency transfer.
Insurance, Reinsurance, Emerging markets