What is Political Risk?

The risks that the return on investments could face due to political changes or lack of stability in an economy are known as political risks. Such inconsistencies can include a change in government structure, foreign policy officers, army officers, or legislative organizations. Also referred to as geopolitical risk, it appears to be more like a factor with time period of an investment becoming more.

Why is Political Risk Important?

It is difficult to estimate political risk as there are not much sample sizes or case studies related to a specific country. There are many foreign agencies or government institutions that help in mitigating the extent of political risks. If political risk occurred, it would result in decreasing the investment returns, or could force the investors for taking capital off from an investment.

Types of Political Risks

Besides businesses getting affected by market-based factors, political decisions also affect businesses and their operations. There are many decisions such as expenditure, foreign exchange, minimum wage rate, environment policies, tax policies, etc. made by the government that affect organizations, sectors, and sometimes, the whole nation. The enforcement of different laws affects the economy too. There can be regulations made in local, state, and federal level of different nations. Many companies enlist political risks with the Securities and Exchange Commission, or a prospectus, or a prospectus in case it is a mutual fund.

Insuring Against Political Risks

Multinational companies that have branches in different parts of the world can buy political risk insurance for eliminating or nullifying political risks. This enables the company as well as investors to focus on the primary business operations with an assurance that political risks wont hinder their investments or activities. Different activities that are covered under such insurance include terrorism and war.

An Example of Political Risk

Wal-Mart Stores Inc. mentioned specific political risks, that it experiences, in its 10-K filing in the fiscal year 2015 with the Securities Exchange Commission in its category of operating risk. Regarding its risks related with suppliers, the company informed prospective instability in the political and economic operations of countries that are operated by international suppliers. The other section involving Wal-Marts regulatory, compliance, reputational and other risks involves risks concerning legislative, regulatory, jury-based, and political or economic risks. Many risk factors involve product safety, political changes, legal issues, environment policies, tax regulations, trade policies, and currency-based policies. Wal-Mart particularly emphasized on Brazil, and the complications associated with its federal, state, and domestic laws.

Related Topics

• Insurance Law (Intro)
• What is insurance?
• Captive Agent
• Independent Agent
• Captive Insurance Company
• Underwriter 
• Combined Ratio
• Claims Adjuster
• Capital at Risk
• Assigned Risk
• Contingency
• Incurred But Not Reported
• Actuary
• Qualified Actuary
• Cession (Re-Insurance)
• Burning Cost Ratio
• What is an insurance contract?
• Accidental Means
• Anti-stacking Provisions
• What is an insurable interest?
• What are the common categorizations of insurance?
• National Association of Insurance Commissioners
• Insurance Regulatory Information System
• American Academy of Actuaries Definition
• American Association of Insurance Services Definition
• American Council of Life Insurance Definition
• American Insurance Association Definition
• American Risk and Insurance Association Definition
• LLoyd's of London
• Associate in Insurance Services (AIS) Definition
• Associate in Loss Control Management Definition
• Associate in Marine Insurance Management Definition
• Associate in Personal Insurance Definition
• Associate in Reinsurance (ARe) Definition
• Associate in Risk Management Definition
• Associate in Commercial Underwriting Definition
• Associate in Insurance Accounting and Finance Definition
• Associate in Surplus Lines Insurance Definition
• Chartered Insurance Professional Definition
• Chartered Life Underwriter Definition
• Chartered Property Casualty Underwriter Definition
• Vehicle insurancePrivate Passenger Auto Insurance Risk Profile
• Underinsured Motorist Coverage
• Uninsured Motorist Coverage
• Omnibus Clause
• Health insurance
  
• Health Maintenance Organization
• Capitated Contract
• Point of Service Plan
• Children's Health Insurance Program
• Disability Insurance?
• Credit Disability Insurance
• Life Insurance?
• Cash Surrender Value
• Absolute Beneficiary
• Acceleration Life Insurance
• Accelerated Benefit
• Accelerated Option
• Accelerative Endowment
• Charitable Gift Life Insurance
• Incontestability Clause
• Waterfall Concept
• Annuitization
• Assumed Interest Rate
• Clean Sheeting
• Hazard Insurance 
• Homeowners, Renters, and Fire Insurance?
• Participating Community (Flood Insurance)
• Insurance Considerations for Business
• Business Liability Insurance
• Commercial General Liability
• Liability Risk Retention Act
• Excess Insurance and Umbrella Insurance Policy
• Business Interruption Insurance
• Key Person Insurance Definition
• Own-Occupation Policy
• Self-Funded Health Insurance Plan
• Basket Retention Policy
• Commercial Blanket Bond
• Alternative Risk Transfer Market Definition
• Commercial Property Casualty Market Index Survey
• What are the primary obligations of the insurer?
• Earned Premium
• Reservation of Rights Letter
• Subrogation
• Collateral Source Rule
• What are the primary obligations of the insured?
• Insurance Premium
• Cooperation Clause
  
• Coinsurance
• Co-Pay
• Affidavit of Loss
• What is the general structure of an insurance contract?
• Ambiguity Principle
• Accommodation Line
• What are the common disputed provisions in an insurance contract?
• Absolute Exclusion
• All Risks Clause
• What is required for the termination of an insurance contract?
• Risk Management
• Professional Risk Manager
• Associate in Management (AIM)
• Financial Risk Manager
• Forecasting (Business)
• Objective Probability
• Unconditional Probability
• Enterprise Risk Management (ERM)
• Operational Risk
• Business Recovery Risk
• Political Risk
• Asset Protection
• Performance Bond
• Barra Risk Factor Analysis Definition
• Above Ground Risk (Mining Industry)
• Bumbershoot Policy (Maritime)
• Abandonment Clause (Boat or Vessel)
• Bobtail Liability Insurance (Trucking Industry)
• Anti-Indemnity Statute (Construction)