More and more U.S. companies are doing business on an international stage. Though a lucrative option for businesses able to capture share in emerging markets, doing business in other countries brings with it different laws, unfamiliar risks and potential political unrest unlike anything most U.S. companies have experienced.
“In my experience as an account executive, I found that just about every client company that I have that is doing business internationally, whether it’s a multinational enterprise with many operations overseas or just exporting or importing, is going to have some type of exposure to political risk,” says John Hertzer, vice president at Aon Risk Services, Inc.
Smart Business spoke to Hertzer about how companies can protect themselves when doing business abroad.
Why should companies obtain political risk insurance?
A simple and short definition of political risk is the action or omission of a foreign government to either deprive the corporation of all or part of its assets or prevent or restrict the performance of a contract. Companies doing business overseas are usually exposed to that in some way or another.
You’ll tend to find that the attention and the need for political risk insurance are greater in the emerging market countries rather than the developed countries — although, that’s not always true. The predominance of this coverage is sold to companies who are working outside of places like Western Europe, Australia, New Zealand or Japan.
Has the need for this insurance grown proportionate to the increase of global business?
The need certainly has. I think the question of whether the companies have taken up the requirement as much as we think they should is another story. And there’s a reason for that. Corporations spend millions of dollars on basic property casualty coverage. Political risk and its cousin, trade credit insurance, are discretionary purchases. So you have to ask yourself whether buying catastrophic coverage such as this makes economic sense. Sometimes you guess right, and sometimes you don’t.
Again, how much of this risk takes place in an emerging market? Some companies are in 20 or 30 countries, and only three or four of those are considered emerging markets, so the company has to quantify its risk first and then explore where it is going to transfer risk by purchasing insurance.
We normally suggest that clients buy insurance to cover all of their property/casualty risks and not just the ones that will cause some sort of loss. Political risk insurance tends to be a little different in that regard. Companies use what an underwriter would call adverse selection process wherein companies select the areas where they are most exposed and usually insure those for political risk. Also in this economic downturn a lot of companies that would consider political risk insurance view it as a discretionary or nonessential expense.
