Types of Political Risk Insurance Coverage
Political violence coverage compensates for property and income losses caused by violence undertaken for political purposes. Declared or undeclared war, hostile actions by national or international forces, civil war, revolution, insurrection, and civil strife, including politically motivated terrorism and sabotage, are all examples of political violence covered by OPIC. Actions undertaken primarily to achieve labor or student objectives are not covered.
OPIC pays compensation for two types of losses: damage to tangible assets, and business income loss caused by damage to tangible assets. An investor may purchase one or both coverages.
PRI Facilities for Private Equity Investment Funds
As of December 2011, Private equity fund investments in emerging markets, where investor prospects are growing far more rapidly than in developed markets, can now be protected by political risk insurance (PRI) arranged by the Overseas Private Investment Corporation (OPIC), the U.S. Government’s development finance institution.
The new OPIC insurance facilities stand to provide important protection for investors in challenging markets such as the Middle East and Africa, where investment is most urgently needed and where political uncertainty has obscured the fact that those markets typically generate lucrative rates of return.
In addition, OPIC-supported PRI facilities will help to accelerate capital-raising cycles for investment funds by providing fund managers and their limited partners with long-term coverage against the risk of losses to their investments which may be caused by expropriation, currency inconvertibility, and political violence. PRI coverage can significantly mitigate the risks posed to emerging market private equity investors, and thereby increase their appetite to pursue the opportunities available in the developing world.
The new facilities will enable OPIC to arrange PRI for either all individual investments for all of a fund’s investors, or the specific investment amounts of a select group of investors in a fund. PRI facilities are available either through direct OPIC insurance or through an OPIC-sponsored private insurer reinsured by OPIC and backed by the U.S. government’s Full Faith and Credit AAA rating.
The coverage provided can be as broad or as narrow as needed and may include protection for damage caused by political violence and for losses due to unlawful acts. For example, OPIC is developing insurance products for the renewable resources sector, specifically to protect investors against a government’s change in the feed-in tariff that the investor has relied upon to structure its project; and to cover investment in forestry projects, including Reducing Emissions from Deforestation and Forest Degradation (REDD) projects.
As an EDN OPIC political risk insurance provider, let SEA Consulting and Associates facilitate your PRI needs.
Assets coverage compensates for loss of or damage to tangible property caused by political violence. Compensation is based on the investor’s share of the adjusted cost of the property or replacement cost. Adjusted cost is defined as the least of the original cost of the item, the fair market value at the time of loss, or the cost to repair the item. OPIC may pay replacement cost up to twice the original cost of the lost or damaged property, provided the property is actually replaced within three years.
Business Income Coverage
Business income coverage protects the investor’s share of income losses resulting from damage to, or loss of, the use of the assets of the foreign enterprise caused by political violence. In addition, OPIC can provide coverage for evacuation expenses and income losses if the political violence causes the evacuation or temporary abandonment of operations of a project. With an “off-site” rider, OPIC also may compensate for income losses resulting from damage to specific sites outside the insured facility, such as a critical railway spur, power station, or supplier.
Compensation is based on what the project would have realized in net income but for the damage or loss of use of the assets, plus the investor’s share of the project’s continuing, normal operating expenses that must be paid during the time the damage is being repaired. OPIC will also pay for expenses that reduce the business income loss, such as renting a temporary facility. Compensation is paid for the period until productive capacity can reasonably be restored, not to exceed one year.
Expropriation coverage protects against the nationalization, confiscation or expropriation of an investment, including “creeping” expropriation, due to unlawful government acts (or a series of acts) that deprive the investor of its fundamental rights in a project. The coverage excludes losses due to lawful regulation or taxation by host governments and actions provoked by the investor or foreign enterprise.
For equity investments, compensation is based on the book value of the investment as of the date of expropriation. In most cases, OPIC covers total expropriation only. To receive compensation, an investor must assign all rights in the insured investment to OPIC. For parent-company loans to subsidiaries, compensation is based on outstanding principal and accrued interest that would have been paid.
Coverage for expropriation of funds only — unlawful host government blockage of funds intended to be remitted as returns of the insured investment or earnings on it — may be purchased for a reduced premium in conjunction with currency inconvertibility coverage. Insurance for specialized risks peculiar to a specific project may be available, including, for example, coverage against losses resulting from the unlawful breach of specific host government obligations identified by the insured at the outset as vital to the successful operation of the project. Under certain circumstances, OPIC is also able to cover the unlawful breach of specific contractual obligations of a sub sovereign or a corporation owned or controlled by a foreign government. These coverages are available on a case-by-case basis and will be individually rated.
Currency inconvertibility coverage compensates investors if new currency restrictions, or other government action or inaction, prevent the conversion or transfer of investment returns from insured investments. Currency restrictions may take the form of new, more restrictive foreign exchange regulations or a failure by exchange control authorities to act on an application for hard currency.
OPIC inconvertibility coverage may insure earnings, returns of capital, principal and interest payments, technical assistance fees, and similar remittances on insured investments.
OPIC inconvertibility coverage does not protect against the devaluation of a country’s currency. Rather, OPIC insures investors against deterioration of their ability to convert local currency or transfer dollars from the project country through any legal exchange mechanism sanctioned by the central government of the project country.