Rates for private political risk insurance are generally higher, but are justified by greater
speed, flexibility and capacity. The risks that can be covered in today’s market by political
risk insurance are summarised in Exhibit 10.2.
Gore and Hawkes also explained that a lender takes out private political risk insurance
to cover a stream of payments due from a borrower. If an insured event prevents the borrow-
er from making a scheduled payment, the insurer indemnifies the lender for the agreed per-
centage of the loss caused by that event. Often, in a syndicated bank financing, one bank acts
as the insured and participates out its beneficial interest in the insurance policy to a trustee or
agent that is appointed as loss payee to collect insurance proceeds. For this purpose the loss
CBK, THE PHILIPPINESExhibit 10.2
Insurable political risks
Asset-based risks
Confiscation, expropriation, Selective and discriminatory acts by the host government causing
nationalisation, deprivation (CEND) permanent loss of benefit of a venture without fair compensation
Forced divestiture Permanent divestiture of a shareholding in a foreign enterprise by the
investor’s own government or by a foreign government
Forced abandonment Abandonment of a foreign enterprise arising from a deteriorating
security situation
Arbitration award default Default by a government on an obligation arising from an arbitration award
Import/export licence cancellation, The prevention of import or export of goods or technology from any
embargo country due to the cancellation of previously obtained import/export
licenses or prohibition due to embargo
War and political violence Physical damage to the assets of a foreign operation or inability to
continue debt service due to strikes, riots, civil commotion, malicious
damage, international war, civil war or terrorism
Trade-related risks
Currency inconvertibility The inability of the country/central bank to exchange deposits of local
currency representing principal, interest, earnings, dividends,
management fees, etc., deposited by a foreign enterprise for exchange
into a designated foreign currency
Exchange transfer risk The host government/central bank blocking or refusing to transfer
deposited funds in the host country to a designated foreign location
Contract frustration The nonfulfilment of a contract due to ‘political events’, including
import/export licence cancellation, embargo, government buyer’s
nonpayment or repudiation, CEND (see above), currency inconvertibility,
war, or not honouring a letter of credit
Unfair calling of guarantee/wrongful The unfair drawing down of an on-demand, standby letter of credit posed
calling of guarantee as a bid, advance payment, warranty or performance guarantee by a
government entity; or a fair drawing where the contract terms are
unfulfilled due to a political risk
Source: Galvao, Daniel, ‘Political Risk Insurance: Project Finance Perspectives and New Developments’, Journal
of Project Finance,Summer 2001, p. 35.