Description
Political Risk Insurance (PRI) is a de-risking tool that helps mitigate risks arising from the adverse actions—or inactions—of governments (e.g., expropriation, currency inconvertibility and transfer restrictions, breach of contract), war, civil unrest, and terrorism. PRI can be provided by multilateral agencies (with a development mandate), or national export credit agencies (ECAs) which typically support investors and lenders from their home country. Private for-profit PRI providers also exist.
Benefits
By helping to avoid potential losses due to political causes, PRI helps provide a more stable environment for investments into developing countries, and, as a result, to unlock better access to finance. It enhances investors’ confidence in markets perceived as riskier, therefore allowing them to concentrate on the commercial aspects of their investments. In certain cases, PRI also reduces the provisioning requirement of lenders, thus improving overall financing terms.
Case Study
Marsh extended Political Risk Insurance in West Africa
Marsh, a global leader in insurance broking and risk management, is an example of commercial PRI provider.
In April 2024, Marsh arranged a highly bespoke private political risk insurance solution for a renewable energy investor working with a large lithium mine in Mali that was looking to replace conventional power generation for a mine operation. The developer-owner-operator of the project invested USD 36 million in equity – which was the policy's limit of liability – for a captive solar, thermal, and battery storage facility to be installed at the mine, with the mine owner being the sole power off-taker. The PRI was “extended” as it not only covered the newly developed power project, but also the additional risk of Government interference at the mine that risked indirectly impacting the project performance and viability. Covering two legally separate but physically linked assets with different risk profiles was a challenge that this extended PRI solution allowed to overcome.
The PRI package provided by Marsh comprised coverage for events affecting the insured’s assets as well as political risk events affecting the mine. Extending political risk insurance coverage in this way allowed the insured to obtain sufficient comfort that they had de-risked the project adequately, given its exposure to the mining sector.
Marsh was instrumental in drafting unique policy terms and conditions to accommodate such political and contractual complexity. The solution developed allowed the client to ultimately agree to sign the project / supply agreements with the Lithium mine. This successful project allowed a significant reduction in the local cost of energy as well as increased certainty over power delivery for a remote area of Mali, while reducing the carbon footprint of the mine.
Additional Sources