A voter
By: Mawuli Zogbenu
Elections are a major agenda in the political calendar of any country the world over; it is little wonder that many businesses are said to determine whether they are ‘going’ or ‘coming’ when the time approached for leaders to be voted into key positions of national dimensions.
There have also been age-old speculations of some contestants literally desiring to ‘kill’ just to win elections or when they disagree with the outcome of elections, especially if they happen to be on the losing end.
Similarly, terrorism can be linked to the choice of some leaders in flashpoint countries. For instance, the recent Paris terrorist attacks may undoubtedly impact on investor decisions. While potential investors may adopt a ‘wait and see’ attitude, existing investors will be deeply concerned about securing their businesses in the event of similar attacks.
Sadly though, these threats are largely noticed after they had occurred as the pre-execution signals are often guarded.
That notwithstanding, the relative macroeconomic stability sweeping across nations implies that the economic atmosphere in many developing economies are rife for investment; be that as it may, there are certain national challenges such as political upheavals and terrorist attacks which may not have been envisaged by prospective investors at the time of making their investment decisions. But these risks could eventually ruin investment fortunes.
Offshore Ghanaian businesses
In the recent past, many indigenous Ghanaian companies have expanded their operations into the West African sub-region as a result of emerging market opportunities in the sub-region. Notwithstanding these opportunities, the beckoning political and civil strifes in some of these countries leave much to be desired. Indeed, both security and financial pundits have posited that decisions by organisations to expand into the sub-region must consider the following political risks in particular:
Civil strife, coups, wars and other acts of politically-motivated unrests including terrorism;
Expropriation, including abrogation, repudiation and/or impairment of contract and other improper host government interference; and
Restrictions on the conversion and transfer of local-currency earnings, among others.
In all of these, investors must also note that while their overseas operations are not covered by a Standard Property All Risks insurance or a stand-alone terrorism policy, they may, however, be covered by a Political Risk Insurance policy.
Political risk insurance
A Political Risk Insurance is a specialised form of insurance that protects companies operating internationally against the negative effects of arbitrary government action, political violence, perils from strikes, riots and civil commotion through terrorism and insurrection, currency inconvertibility and transfer risks. The important thing to note is that cover under this policy is far more widely and offers the investor good terms of cover that is far more attractive to protect the investor in an overseas economy before the climate deteriorates and becomes unfriendly to investors. Generally, the following two political risk insurance are isolated:
Contract Frustration: Companies doing business directly with foreign governments or with government contractors obtain political risk insurance to protect them against payment defaults, license cancellations or repudiation of their contracts.
Asset Protection: Lenders, investors and contractors with equipment, inventories or cash in foreign countries purchase political risk insurance to protect their assets against expropriation, political violence and currency inconvertibility.
Indeed, political risk insurance can also be written to indemnify against frustration of contracts with private-sector entities that might be unable to perform due to local/international government actions or political events that would be out of their control. Similarly, if a business relies on licenses issued by foreign governments, then political risk insurance can cover against cancellation of import or export permits, as well as, embargos, boycotts, sanctions or decrees causing business interruption, payment defaults or other losses.
Insuring assets against expropriation
Under this policy, protection is sought against confiscation, expropriation, nationalisation and other foreign government actions or political events which would deprive you of your rights of ownership, security interests or control of your assets situated in other countries. It also covers your ability to repatriate your assets, for example, getting your equipment out of the country after completing a contract or the return of equipment following the termination of a lease agreement.
Protecting currency against inconvertibility
Here also, the protection is against inconvertibility of local currency into US dollars or other hard currency, as well as the inability to transfer hard currency out of the country. Currency inconvertibility policies apply to losses resulting from financial crisis, hard currency shortages, exchange controls or arbitrary political decisions by a foreign government.
Covering business against political violence
Under this policy, protection is sought against non-payment, loss of income, business interruption, loss of equity investments or damage/destruction of physical assets due to political violence. It may also cover war, revolution, civil unrest, rioting, public strikes, armed uprising, insurrection, terrorism, sabotage, acts of malice, or other political events or government actions.
How it works
The amount to be covered under all limits must equal at least the book value of the insured investment in the country unless the insured chooses acceptable floor coverage. In such circumstances, there will be no charge for the difference between the floor coverage and the active amount. For most other investment types, premiums are computed based on a maximum insured amount, current insured amount (CIA) and a standby amount.
The maximum insured amount represents the maximum insurance available for the insured investment under an insurance contract. The Current Insurance Amount represents the insurance actually in force during any contract period. The difference between the two represents the standby amount. Separate premiums are charged for CIA and standby amounts.
For loans obtained by the investors, premiums are charged on the “covered amount,” the amount of disbursed principal plus accrued interest less principal paid to date and a standby fee is charged for undisbursed principal.
With currency restriction and convertibility, when the laws of the country places restrictions on currency conversions and repatriation, investors are able to recoup all losses that may arise due to in-country currency depreciation etc.
Currency inconvertibility policies apply to losses resulting from financial crisis, hard currency shortages, exchange controls, or arbitrary political decisions by a foreign government.
The way forward
In years past, most Ghanaian entities have not conceived the idea of expanding their operations abroad as they are usually content with operating locally. However, recent economic developments and the desire to grow market share has propelled the expansion of most Ghanaian businesses into emerging markets, particularly within the sub-region. Unfortunately, the sub-region has been bedeviled with political unrests; causing companies to lose their fortune.
It is , therefore, imperative for local companies desiring to expand into the sub-region to seek professional expertise, particularly in political risk analysis before venturing into their countries of choice. This will help them make the necessary decision regarding what type of cover to take to secure their business.
Beyond developing attractive policies relating to local businesses expanding abroad, insurers must also educate business owners on the need to protect their investments abroad through such policies. Is it not possible for Ghanaian insurers to consider these forms of insurance going forward?
Until next week, “This is Insurance from the eyes of my mind.”
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