A political risk constitutes exposure to lose as a result of political conditions. For instance, political instability, change of government, military coups, and acts of terrorism may expose an investment to the possibility of loss. In the same vein, a business may lose as a result of the government acting or failing to act in a certain way. Thus, local and foreign companies continue to grapple with political issues that may expose their businesses to significant losses.
Political risks may have far-reaching implications on a business. As such, a business that operates in a politically unstable region has to embrace certain management practices to improve performance. Thus, sound political risk management practices constitute critical measures that a business might take to reduce the impact of political conditions or actions on performance. Similarly, a company strategizes to make the best out of opportunities that political changes might present. In the end, a business ensures protection of new and existing investments from adversity that is linked to politics.
Businesses have to come up with deliberate and systematic strategies to contain political risks. For instance, corporations implement political risk assessment strategies in their operating environments. Evaluation of political risks plays a role in formulation of policies and making of decisions that optimize business performance. In the same vein, a systematic approach towards political risk management makes it possible to take actions that add value. For instance, a corporation may decide to take insurance coverage to deal with existing or anticipated political risks. Such a move may prove feasible to an investor who is not considering pulling out of a politically unstable region.
Political risk insurance is a mitigating tool that helps businesses secure stable operating conditions despite political instability. When a corporation aspires to venture into foreign territory that is perceived to be risky for political reasons, it makes sense to seek assurances of reimbursement for losses caused by political events. Thus, political insurance allows corporations to operate confidently and focus on core businesses in the face of political uncertainties.
Political risk insurance provides coverage for a variety of risks. For instance, a corporation that operates in a foreign country may face the risk of expropriation. Expropriation may lead to loss of income, especially when the government interferes with a corporation’s right of ownership of property or investment. Thus, political risk insurance can ensure commensurate compensation when a corporation suffers loses as a result of confiscation or nationalisation of its interests.
Similarly, political risk insurance provides reimbursement for losses suffered due to political violence. Political violence that results from military coups, acts of terrorism, dictatorship, riots and sabotage may cause damage to property. When political violence causes a business to lose income, political risk insurance can provide timely mitigation.
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Equally important, political risk insurance provides coverage for interruption of business for a variety of reasons. For instance, if a company has to stop operations or relocate for political reasons, it may be compensated if it has the appropriate insurance cover. Similarly, political risk insurance mitigates loss in the event of forced abandonment. Thus, the cover ensures commensurate compensation when a corporation is forced to evacuate key expat personnel under instructions from the government or because of other political factors.