Catalog

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p. 3 of 21 BACK | NEXT I. Introduction II. An Overview of the Political Risk Insurance (PRI) Market A. Types of PRI Investment Coverage B. Major Underwriters in the PRI Market C. Premium Rates and Loss Histories of Major PRI Underwriters III. Review of ADB's Partial Risk Guarantee (PRG) Program IV. Recommendation for Changes to ADB's PRG V. Potential Benefits of the Proposed PRJ Program VI. Conclusion

Review of the Partial Risk Guarantee of the Asian Development Bank : II. An Overview of the Political Risk Insurance (PRI) Market

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A. Types of PRI Investment Coverage

1. Expropriation

4. Expropriation insurance, the centerpiece of PRI for investments, is commonly referred to as confiscation, expropriation, nationalization, and deprivation (CEND or expropriation) coverage. CEND coverage is designed to protect a foreign investor when a host government interferes with the investor’s fundamental ownership rights. This may take the form of a direct seizure of an asset, such as fixed investments or plant and equipment. It may also take the form of an action or a series of actions, the net effect of which is expropriatory, referred to as “creeping expropriation.” Examples include the imposition of punitive or selective taxes that make a venture commercially unviable, wrongful termination of operating licenses, or refusal to grant visas to foreign managers critical to running the operation.

5. Under international law, a host government has the right to seize a foreign-owned asset. However, it is generally accepted that compensation must be provided on a prompt, adequate, and effective basis. When expropriation occurs and such compensation is not provided, CEND insurance responds by providing compensation to an equity investor based on the net book value of the expropriated assets, or to a project lender based on the schedule of payments that were missed as a result of the expropriatory act.

6. CEND insurance providers take varying approaches to determining what constitutes expropriatory action. Some require that the action must have discriminated against the investor; others require that the action must have selectively or expressly restricted the insured’s operations. Most expropriation coverage requires that the expropriatory action continue for an extended period, typically six months to one year, at which point the action is deemed permanent and compensable.

2. Currency Inconvertibility or Nontransfer

7. Currency inconvertibility and/or nontransfer coverage (commonly referred to as CI coverage) is intended to ensure that dividends, profits, fees, share capital, and loan proceeds from an insured project are remitted or repatriated from a host country in a timely fashion and at prevailing rates. The conversion of convertible local currency into foreign currency, and the transfer of that currency out of the host country are covered for both “active blockage” (wherein a local law prevents conversion or transfer) and “passive blockage” (in which excessive delays in processing a request to convert or transfer currency by the governing monetary authority prevent repatriation). The amount of currency that could not be converted or transferred is the subject of the coverage.

8. CI insurance does not protect against currency fluctuation, devaluation, or any preexisting restrictions on conversion or transfer. If an investor applies to convert local currency into foreign currency and the host government’s central bank not only failed to convert the currency in a predefined time period, but also refused to return the local currency to the investor, the investor would not be able to file a CI claim. In such a case, the currency will have been effectively expropriated. For this reason, CI coverage is almost always purchased in conjunction with coverage of such expropriation of funds.

3. Political Violence

9. Political violence coverage refers to physical damage to an asset as a result of politically motivated strikes, riots, civil commotion, terrorism, sabotage, war, and/or civil war. While standard property insurance can cover losses due to strikes, riots, civil commotion and perhaps terrorism, damage due to war is usually excluded. Coverage usually applies to the lesser of repair, replacement, or fair market value. In addition, coverage for business interruption may be available for net profit lost, and compensates for defaults caused by political violence.

4. Breach of Contract

10. Breach of contract coverage refers to losses arising from a host government's breach or repudiation of a contract with the owner of an insured project. For example, for a power project such a breach may result from failure by a government-owned entity to make payments in accordance with the power purchase agreement between the independent power producer and the user or distributor. For a toll road project, such a breach may result from a government entity failing to comply with the agreed increase in toll levels. In the event of an alleged breach or repudiation, the investor or project company must normally be able to invoke a dispute resolution mechanism (e.g., arbitration) in the underlying contract and first obtain an award for damages. If, after a specified period of time, the investor is unable to implement the outcome of the dispute resolution mechanism, or if the dispute resolution mechanism fails to function because of actions taken by the host government, PRI will be called upon to pay compensation.

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