Political risk insurance for financiers 
 

 Political risk insurance for financiers 

When a financial institution makes a loan to an overseas project or investment involving an Australian investor or sponsor, or provides a hedge facility to the project or investment in connection with such a loan, the financial institution accepts that the project or investment will involve commercial risk.

However, the project or investment may be located in a country with an unstable political environment. Political events can cause significant difficulties for a project, including preventing those involved from meeting their financial commitments. As a result, the financial institution, whether acting as a lender or hedge provider, may consider taking out political risk insurance (PRI) with EFIC to protect it from financial loss caused by particular political events.

EFIC’s PRI Lender policy can insure a lender against the borrower defaulting on scheduled loan payments due to a specified political event.

EFIC’s PRI Hedge Bank policy can insure a hedge bank against a hedge counterparty’s:

  • non-payment of an amount when due or
  • non-delivery of an agreed quantity and quality of a commodity (such as gold or copper)

under a hedge facility due to a specified political event.

A PRI Hedge Bank policy is typically issued with a PRI Lender policy, when a project finance loan requires that a hedge facility be in place. In that case, the borrower under the loan facility is also the company to which the hedge bank is providing the hedge facility (the hedge counterparty).

PRI for lenders or hedge providers covers financial loss due to political events specified in the policy, which may include:

  • expropriation – for example, nationalisation or confiscation of the investment or project by the government of the host country
  • war damage
  • political violence
  • inability to convert local currency or transfer currency out of the host country
  • deprivation – for example, the host government cancelling a licence to export the output of the investment or project, permanently preventing it from operating
  • forced abandonment – abandonment of an overseas company or project on the advice of the Australian government.

In certain circumstances, cover can also be provided for other political events, such as selective discrimination or default by the host government of an arbitral award following a breach of contract.

PRI cover for lenders and hedge banks is available for investments in both new and existing companies and projects.

What are the benefits?

  • Helps protect the lender or hedge bank from financial loss due to specified political events.
  • Can give the financial institution more confidence to finance a project or investment in an emerging or developing market.

How does political risk insurance work?

Product diagram for political risk insurance financiers

Notes:

  1. A financial institution provides a loan to an Australian investor for its participation in an overseas company or project and/or a hedge facility in relation to the loan.
  2. The Australian investor makes an investment in the overseas company or project.
  3. EFIC provides political risk insurance to help protect the financial institution from financial losses due to specified political events.

Terms and conditions

Terms and conditions will be negotiated during the application process. The following guidelines provide an indication of typical requirements:

Eligibility

You should be a financial institution (or its subsidiary) carrying on business in Australia that is providing either or both of:

  • a loan to an overseas project or company or
  • a hedge facility associated with a loan to an overseas project or company.

The construction or operation of the project or company must involve an Australian sponsor or Australian-sourced goods or services.

Level of cover

Up to 100% of the loss insured.

Term

The policy term usually matches the term of the underlying loan agreement or hedge facility. The maximum term is 10 years.

Fees & charges

EFIC’s premium depends on factors such as the location and type of the investment or project, the term of the policy and the risks insured.

 

NOTE: Information on terms and conditions is supplied as a guideline only.  EFIC’s compliance with legislation and OECD guidelines, together with its  risk assessments and other policies, influence the actual terms and conditions that may be applicable to any eventual transaction with EFIC.