An increase in piracy, the war on terror and the financial crisis have put a renewed emphasis on political risk cover, but the insurance industry is struggling to keep up.

Global economic uncertainty in recent years has encouraged a reassessment of what “political risk” covers. Even before the current crisis the insurance industry found it difficult to keep pace with change. In the past two decades, such risks, for insurance purposes, have included (along with terrorism, riots and conflict) an expanding range of commercial risks that have a political trigger.

These include:
● “Contract frustration”, ie where a foreign government or company does not abide by the terms and conditions of the contract;
● Currency transfer restrictions, ie the inability to convert local currency into foreign exchange to allow transfer outside the host country (or excessive delays in acquiring foreign exchange).
● Confiscation, ie the seizure and expropriation of private property by a government, often characterised as a penalty for an alleged breach of law.
● Nationalisation, ie the taking of control by the government over assets or over a corporation.

Increased interdependence
Although many factors accounted for this changing environment, it reflected above all the increasing interdependence between “developed” and “developing” nations. This is at its starkest, for instance, in the context of energy supply. During the early 2000s, international companies, their governments and their insurers took due notice of the seizure of control of key assets and/or businesses by a number of Latin American countries (so-called “economic nationalism”). The most prominent example was in 2007 when Venezuela took a majority stake in four oil projects operating in the Orinoco river basin worth an estimated US$30bn, to the detriment of a number of key international investors.

Other “host” governments have either shied away from such overt acts or, for instance in the case of many African countries, do not have the existing infrastructure to replace the foreign operations. Instead, some countries have adopted more indirect approaches and, in turn, insurers have increasingly recognised that, while there might be no single act of expropriation, a series of measures – tax reforms, regulatory controls, tariff adjustments arbitrary charges, etc – can together amount to such activity.

As a consequence, concepts such as “creeping”, “indirect” and “partial” expropriation have gained currency, particularly following a series of decisions arising out of arbitrations before the International Centre for the Settlement of Investment Disputes (ICSID). By way of example only, in Tecmed v Mexico, in construing the terms of the applicable bilateral investment treaty (BIT) between Mexico and Spain, the tribunal held that expropriation can include “a number of situations defined as de facto expropriation, where… actions or laws transfer assets to third parties different from the expropriating state or where such laws or actions deprive persons of their ownership over such assets, without allocating such assets to third parties or to the government”.

A single act of expropriation by the state is not required. It is enough if the measures adopted by the state are irreversible and if the effect of those measures is that the investment is permanently deprived of economic value.

Of course, it may be difficult to identify interference with an investor’s rights. It will be a question of fact in each case whether the effect of the state action is such that the investor’s rights can no longer be exploited.

The global financial crisis since 2007 – and the social and political instability that has accompanied it – has led to yet further re-assessment of political risk.

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