What is Political and Credit Risk Insurance?
PRI is typically used by companies investing in, or banks lending to, a project or assets in an emerging market country where the project credit risk is acceptable but the sovereign risk is of concern. In its simplest form, PRI is the solution to cover the risks of:
- expropriation, confiscation or nationalisation of a project or asset by the host country;
- non-transfer of foreign exchange or currency inconvertibility; and
- war, civil strife and other forms of political violence.
PRI can be extended to cover additional perils:
- for industries such as mining, a PRI policy can also cover the risks of forced abandonment, forced divestiture, embargo, export licence cancellation, operating licence cancellation, blockade and selective discrimination; and
- if a foreign government has agreed to pay for the output of a project, supply goods or services, or guarantee the contractual obligations of a government agency, PRI coverage can be extended to cover the risk of non-payment or breach of guarantee.
CRI is often used to help a bank or company reduce its lending commitments, or manage its receivables or the credit it extends to its customers, and provides protection against the risk of a payment default by the borrower or (if the loan or obligation is guaranteed) by the guarantor. Although not usually available for unsecured corporate lending, CRI is widely used to provide "single-situation" cover for secured loans (whether structured trade finance, asset finance or project finance). As well as cross-border loans and investments, CRI can also cover domestic credit exposure.