Political risk insurance is diverse

Political uncertainty can be expensive. Wars, riots, coups, embargoes were traditionally the government’s headache alone but not anymore. Political risks concern investors in almost an equal measure. Risk officers, export managers and international companies are thoroughly scrutinising prospective investment destinations -with a tooth comb -before any investment.

The risks have far reaching economic and social impact: Stock market; economic growth; consumer confidence and foreign direct investment. Businesses must therefore take keen interest in the political environment in the country of operation.

This information enables a firm to calibrate the risk appetite and succinctly learn the risk-return mechanics. Investors must always pull their external political antennae to pick up on developments that are likely to have a substantial impact on their areas of operations. Indeed, while investing there is no substitute for enhanced due diligence on local political risks.

I recently overheard an interesting chat at my barber shop. The animated debate revolved around the effects of politics on the business environment. Referring to his shop as a kiosk, my barber concluded,” With these horrible political skirmishes and protests even kiosks will be forced to seek insurance against these unforeseen risks.”

The debate had been elicited by the recent Muslim protests in the city centre. The demos left businesses near the Jamia Mosque counting losses either due to temporary closures, break-ins or looting. There are various strategies that can be adopted to mitigate these risks some include; Political risk Insurance, embracing local partners especially for the foreign investors, Enhanced Corporate social responsibility (CSR) amongst others.

Local partnerships and attractive CSR policies catch the attention of the masses. Few investors are well informed on the political risk insurance; the risks became so real after the political upheavals that challenged our eminent position as the island of tranquility in a neighbourhood full of political failures.

An astute investor will not write off a potential investment destination purely on the basis of the inherent risks only. After all investing is all about taking risks, aptly managing them and ultimately turning them into opportunities.

The flipside of a risk is an opportunity. One of the core goals of a business is to maximize shareholder’s wealth by increasing the value of the shares held. Risk management is thus about identifying risks, evaluating their severity and proactively devising ways of managing them. One of the ways of managing risk is by transferring it to a third party- like an insurance company. Multinationals operating from saturated marketplaces still must extend their reach if they want to grow.

That’s how political risk insurance cover steps in, providing a safety net for the risks associated with doing business in new and alien environments. Indeed, the first issuance of insurance to cover political risk is attributed to the US government. Immediately after the end of World War II in Europe, the US offered insurance to quell concerns arising out of the spread of communism. This ideology made it possible for governments to acquire assets on behalf of the state with no compensation to the investors.

Political risk insurance in Kenya is becoming popular due to the political challenges experienced in the recent past. Due to the risky nature and huge claims involved, most insurance companies have shown little or no interest in political risk insurance.

However, analysis on political risk in Kenya is often-erroneously equated to political violence. By and large, political risks are diverse and may include; Political violence, terrorism or war; governmental expropriation or confiscation of assets; governmental repudiation of contracts; Inconvertibility of foreign currency or the inability to repatriate funds; Unfair discrimination of foreign competitors, in terms of higher taxes or import duties, etc.

Political risk insurance (PRI) is one of the prominent tool businesses use to mitigate these risks arising from the actions of governments. It helps in providing a more stable environment for investments and creates increases the chances of access to finance.

No financier will want to invest in a business that the government can decide to nationalize it any time. PRI takes care of these fears and provides the confidence requisite in doing business.

Political risk encompasses a lot more and often its severity and perception is as unique as there are diverse environs.

In some parts of Africa and Middle East, political turmoil and terrorism is way a major headache for many businesses. Africa has for eons been viewed as a cursed continent especially as seen behind the lens of the Western media; War, riots, coups - almost being the order of the day.