Political Risk Insurance (PRI) protects investors from losses due to political instability, such as expropriation, political violence, and currency inconvertibility. Despite President Milei’s 2024 reforms to attract foreign investment in Argentina, its volatile political climate makes PRI essential, especially for UK investors. PRI offers immediate risk coverage, complementing legal recourse through investment treaties. Historical crises like Argentina’s pesification highlight its importance. Increasingly adopted in the UK post-Brexit and COVID-19, PRI is vital for navigating uncertainties and safeguarding investments in challenging markets like Argentina.
- Introduction[2]
Political Risk Insurance (“PRI”) is a specialised insurance product designed to provide suitable financial protection to businesses and investors thinking of, or currently investing, overseas, against the risks associated with political instability and government action in foreign jurisdictions. PRI mitigates the financial impacts of unpredictable events including but not limited to asset expropriation, political violence, and currency inconvertibility.
While PRI serves as a safety net, empowering investors and lenders to do business with greater confidence even in the face of volatile political climates, it can also be a powerful vehicle for attracting and promoting investments[2] in challenging markets such as Argentina. By mitigating risks that would otherwise deter investors, PRI enables economically and politically vulnerable regions to secure investments that not only have the potential to drive economic growth but also support social development.[4]
This short note is aimed at providing an overview of this type of insurance as well as some legal issues that may arise in connection with insurance claims for risks caused by political events.
2. The scope of PRI coverage
As a contractual arrangement, the scope of insurance covered can be negotiated between the insured party and the insurer. In general terms, PRI has offered coverages in cases of confiscation, expropriation (direct or indirect), deprivation; forced divestiture; unfair discrimination; government-imposed restrictions on exports such as embargos and trade disruptions, contract breaches and license revocation; war losses, political violence and business interruption, as well as currency inconvertibility and exchange transfer.It is not uncommon for PRI to be offered alongside terrorism insurance, as both types of coverage address risks associated with unstable or volatile environments. Indeed, in high-risk jurisdictions, where political instability and terrorism may overlap, insurers sometimes bundle these products.
3. PRI when Investing in Argentina
a. Argentina’s Current Approach to Attracting Foreign Investment[5]
Javier Milei’s presidency marks a significant shift in Argentina’s economic policy. His administration’s pro-market platform aims to stimulate economic growth by fostering competition and attracting foreign investment. One year into his term of office it remains uncertain how the scenario will unfold, the government is implementing measures to encourage international capital flows.
A key focus of the administration is the liberalization of markets, including reforms to reduce regulatory barriers and enhance competitiveness. Labour market reforms[6], aimed at increasing flexibility, have been proposed as part of this strategy, alongside sector-specific incentives such as tax reductions to lower operational costs.
In line with this approach, in July 2024, the government enacted Law No. 27,742, known as the Ley de Bases y Puntos de Partida para la Libertad de los Argentinos. Among other numerous measures, this law introduced a comprehensive initiative called RIGI (Regime of Incentives for Large Investments), designed to provide tax, customs, and exchange benefits for a period of 30 years. The objective is to attract significant investments in key sectors such as forestry, tourism, infrastructure, mining, technology, and energy.
Efforts are aimed at enhancing legal certainty and protecting foreign investments, reflecting a broader commitment to making the country more attractive to investors. Although still a work in progress, these changes could create new opportunities that businesses and foreign investors should consider.
b. Considerations for UK investors planning to invest in Argentina.
While the Milei administration is adopting pro-investment policies, it may be possible for a future administration to adopt a different approach altogether. This can lead to disputes, but also to the need for insuring risks. Thus, PRI becomes a valuable tool for investors interested in exploring the current potentially favorable environment while seeking to mitigate the risks that come with a large-scale investment.
At the outset, it should be mentioned that Argentina has signed bilateral investment treaties (“BITs”) with more than 60 countries, including the UK in 1990[7]. A BIT is an agreement between two countries regarding the promotion and protection of investments made by foreign investors which is enforced by a safe dispute resolution mechanism.[8] The so-called pesification at the beginning of the 2000s in Argentina offers a good example of the importance of PRI.[9][10]
- Context: In sum, pesification was the mandatory conversion of U.S. dollar-denominated obligations into Argentine pesos coupled with the imposition of currency controls. This raised complex legal questions regarding whether the government’s actions constituted “expropriation” or “currency inconvertibility” under the terms of London market PRI policies.
- Insurance Coverage: Market sources suggest that PRI claims arising from the pesification regime became some of the largest in the London market. Various cases triggered coverage and insurers faced substantial exposure. This highlights the importance of precise policy wording to address scenarios involving economic crises and sovereign policy shifts.
c. Subrogation and Interplay Between Investment Treaty Arbitration and Political Risk Insurance[11]
Investment treaty arbitration and the PRI are of complementary nature. PRI provides upfront compensation if the insured risk is covered, while investment treaty arbitration is a legal recourse for investors seeking compensation under the BITs. Both mechanisms often work together, with arbitration serving as a potential backstop for disputes not covered or fully resolved by PRI.
In such a scenario, if coverage is triggered, investors will most likely be firstly paid under their PRI insurance. If subsequently, the investor wins an arbitration award, PRI insurers may invoke subrogation rights to recover their payouts, potentially stepping into the investor’s role in legal proceedings. This dynamic adds complexity to dispute resolution and claims management.
It has also been the general practice of government insurers to conclude agreements with host countries that provide for subrogation. This means that the investor’s rights against the host country are assigned to the insurer upon payment under the insurance contract. The UK and Argentina, in their 1990 BIT, have included a clause within the BIT to the effect that the investor’s rights against the host country are assigned to the insurer upon payment under the insurance contract “[Article 10] If one Contracting Party or its designated Agency makes a payment under an indemnity given in respect of an investment in the territory of the other Contracting Party, the latter Contracting Party shall recognise the assignment to the former Contracting Party or its designated Agency by law or by legal transaction of all the rights and claims of the Party indemnified and that the former Contracting Party or its designated Agency is entitled to exercise such rights and enforce such claims by virtue of subrogation, to the same extent as the Party indemnified.” [12]
4. Understanding PRI in the UK
PRI in the UK is available through private insurers and government-backed institutions like UK Export Finance (UKEF). It is widely used by companies exporting to politically unstable regions such as parts of Africa, South America, and Asia. As a major player in global trade and investment, the UK relies on PRI to secure financing for international projects and protect businesses against disruptions that could affect profitability and operations.
In the UK the PRI market has experienced growth with increasing demand from businesses seeking to safeguard their international operations. According to a 2017 report, the political risk insurance market had been expanding with year-on-year growth nearly every year since 2003. As the drivers of increased demand, the report cites increasing globalisation, political and economic instability, increased nationalism and protectionism, as well as the rise of political populism.[13]
a. Brexit and Political Risk
Traditionally seen as a stable environment, the UK has seen growing awareness of political risks following Brexit. The departure from the European Union led to new customs regulations and divergence from EU standards, increasing complexity for businesses engaged in international trade. For exporters and importers, adapting to separate regulatory regimes has introduced new compliance costs and risks.
b. The Role of Global Events
The COVID-19 pandemic further demonstrated how government policies can disrupt business stability. Lockdowns, health regulations, and financial support packages reshaped economic conditions, emphasizing the importance of PRI in managing unforeseen disruptions.
The UK’s participation in international sanctions, such as those imposed on Russia following the invasion of Ukraine, has also heightened risks for companies with global operations. Sanctions have led to restricted market access and financial losses for businesses trading with affected countries.
c. Sustainability and Emerging Risks
The global focus on sustainability is reshaping the PRI landscape. With the UK pursuing net-zero targets and promoting renewable energy projects, PRI has increasingly been tailored to support green infrastructure. However, industries reliant on traditional energy sources face rising compliance costs due to shifting policies on energy production, imports, and pricing.
d. Mitigating Political Risks
The UK’s strong legal framework is a critical factor in mitigating political risks. Businesses benefit from mechanisms for fair dispute resolution, robust competition laws, data protection regulations (e.g., GDPR[14]), and employment rights. Oversight from institutions like the Bank of England provides additional stability, influencing risks related to inflation, currency fluctuations, and interest rates.
To further assist businesses, the government offers tools such as UKEF-backed support and legal protections through treaties and bilateral agreements, helping safeguard investments and mitigate risks abroad.
e. The UK’s Evolving Risk Landscape
While the UK remains relatively low-risk compared to Argentina and many other countries, fluctuations in its political risk landscape are driven by both domestic policies and global developments. Government actions, such as the National Security and Investment Act[15], which allows the review and blocking of foreign investments in critical industries, can create uncertainty for multinational transactions.
Public dissatisfaction with policies can also lead to disruptions, making stable and investor-friendly governance essential for maintaining business confidence.
Despite these challenges, businesses can manage risks effectively through PRI and proactive strategies. By leveraging the UK’s legal protections and adapting to evolving global trends, companies can protect their investments and ensure operational continuity.
Final remarks
PRI serves different purposes in Argentina and the UK. In Argentina, it is crucial to mitigate the high political and economic risks stemming from frequent policy shifts, such as nationalisations and currency controls. Investors rely on PRI to navigate the country’s instability. In contrast, in the UK, PRI is primarily purchased by investors engaging in business outside the country and in challenging jurisdictions.
This means that whilst essential for managing local uncertainties in Argentina, the focus in the UK is on protecting investment abroad.
[1] The views and opinions expressed in this article are those of the author
[2] Terrorism and political risk insurance: an overview, Practical Law UK Practice Note, Thomas Reuters, 2024.
[3] World Bank, “Political Risk Insurance in a Shifting Landscape for Foreign Direct Investment,” Voices Blog. Available at: https://blogs.worldbank.org/en/voices/political-risk-insurance-in-a-shifting-landscape-for-foreign-direct-investment
[4] Hannah Mayer, Political Risk Insurance and Its Effectiveness in Supporting Private Sector Investment in Fragile States, Blavatnik School of Government, University of Oxford, May 2018.
[5] This section aims to briefly describe the current administration’s economic policies and initiatives, without endorsing or opposing Javier Milei’s political views.
[6] Please refer to Sobal’s October publication on “Workers’ Rights under the Milei and Starmer Administrations: Diverging Approaches to Labour Market Reform” by Mauro Pucheta. Available at https://sobal.org.uk/workers-rights-under-the-milei-and-starmer-administrations-diverging-approaches-to-labour-market-reform-1/?frame-nonce=c67f91c526&_gl=1*d4kygg*_gcl_au*NzI4Nzk5MDQyLjE3MjYwNTkyMzk.
[7] Argentina – United Kingdom BIT (1990) https://investmentpolicy.unctad.org/international-investment-agreements/treaties/bit/161/argentina—united-kingdom-bit-1990-
[8] https://investmentpolicy.unctad.org/international-investment-agreements#:~:text=with%20investment%20provisions.-,A%20bilateral%20investment%20treaty%20(BIT)%20is%20an%20agreement%20between%20two,majority%20of%20IIAs%20are%20BITs. BITs and Multilateral Agreements have been explained in more detail here. Hyperlink to SOBAL’s BITs article.
[9] Martin, Julie A. 2004. Commentary on Political Risk Insurance Providers in the Aftermath of September 11 and the Argentinean Crisis. In Theodore H. Moran (Ed.) International Political Risk Management. Washington D.C.: World Bank. Available at https://documents1.worldbank.org/curated/ar/637611468762910828/pdf/280440PAPER0International0political0risk.pdf
[10] Jensen, Nathan M. Measuring Risk: Political Risk Insurance Premiums and Domestic Political Institutions. Department of Political Science, Washington University, 2005. Available at https://www.sscnet.ucla.edu/polisci/cpworkshop/papers/Jensen.pdf
[11] Martin, Julie A. 2004. Commentary on Political Risk Insurance Providers in the Aftermath of September 11 and the Argentinean Crisis. In Theodore H. Moran (Ed.) International Political Risk Management. Washington D.C.: World Bank. Available at https://documents1.worldbank.org/curated/ar/637611468762910828/pdf/280440PAPER0International0political0risk.pdf
[12] Argentina – United Kingdom BIT (1990) https://investmentpolicy.unctad.org/international-investment-agreements/treaties/bit/161/argentina—united-kingdom-bit-1990-
[13] Laura Hobern and Derek Newton, Political Risk Insurance: A primer, Milliman, 12 October 2017
[14]GDPR Regulations https://gdpr-info.eu/
[15] https://www.gov.uk/government/collections/national-security-and-investment-act
