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Expert Details 10 Steps To Manage Political Risk In Export "Hot Spots"


From the May 2002 edition of Managing Exports

With more U.S. companies exporting to potentially volatile overseas markets every year, the need for export pros to learn the nuances of international political risk management has never been greater. To learn more about this rapidly evolving area of export logistics, ME turned to Thomas Cook, managing director of NY-based trade services consultants, American River International. "The number of political 'hot spots' overseas," Cook notes, "has led to a growing demand for exporters to analyze exposure, adopt risk transfer options, and provide loss control alternatives -in other words, to manage political risk."

Cook is the author of The Ultimate Guide to Export Management (, founder of freight forwarder and customs broker, American River Logistics, and an instructor at the World Trade Institute of Pace University and for the American Management Association.

11 Areas of Political Risk "Political risk management must become a function of the overall logistics management responsibility," Cook notes. This means determining three things: (1) what the exposures are; (2) what the risks are; and (3) how to access the terms before goods are shipped. "Boilerplate policies are not adequate," says Cook. "The policy must be tailored to your firm's international trade practices, transactions, and contracts." Cook also stresses the difference between export credit insurance, which covers exposure emanating solely from the actions of private buyers, and political risk insurance, which addresses perils originating from political or governmental eventualities-regardless of whether the consignee is a government or private entity. Cook classifies political risk coverage into the following 10 areas:

  • Confiscation
  • Nationalization
  • Expropriation
  • Deprivation (a host government interferes with a foreign firm's access to or utilization of its assets without actually taking possession)

These four areas are covered by CNE & D policies. "These are the most commonly purchased political risk coverages," Cook explains, "and it's advisable to insure all four perils in a single policy to minimize potential disputes with insurers over whether an action falls into one category or another."

  • War, strikes, riots, civil commotion, and Terrorism

"These areas are covered by war risk, civil commotion, and terrorism policies," Cook explains. The need for this coverage is dictated by the stability of the regions in which the insured's facilities are located and the scope of the war risk exclusion in their property policy.

  • Contract frustration

"This is another common political risk for which coverage is available," notes Cook. "It entails the nonperformance or frustration of a contract with a host government entity or private buyer as a result of an invalid action." An "invalid action" is one that would be inappropriate and illegal in the United States and that invalidates an overseas transaction in a way that prevents the exporter from obtaining payment for its product or recouping its assets.

  • Currency inconvertibility

"This is an increasing concern for US exporters, especially those selling on open account or providing terms of payment," notes Cook Loss occurs when an exporter's customer pays in local currency and the local government or national bank is unable to convert that currency into US dollars.

  • Unfair calling of financial guarantee

"This risk arises with large transactions that take many months or years to complete," explains Cook, "and in which the buyer typically makes a down payment followed by periodic installment payments as the project progresses." To protect against the danger of the exporter/ supplier defaulting, buyers typically require the posting of a financial guarantee against their payments, on which they can "call" in the event of nonperformance. "To protect against an unfair calling," Cook explains, "the exporter-supplier can purchase unfair calling insurance."

  • Trade disruptions

This includes events like an interruption (or critical delay) of supplies from a third-world supplier that are needed to manufacture exportdestined products, because of war or political unrest. "Such losses," stresses Cook, "include not only the value of the physical product, but also potential loss of earnings, extra expense, and loss of profits and markets." Trade disruption coverage protects against such loss.

  • Devaluation

10 Critical Steps

Cook provides "10 critical steps" to guide export pros in purchasing political risk insurance:

  1. Selection of Broker/Underwriter: "The broker is the first line of contact, so selection is critical," notes Cook "There are many brokers who can talk around the subject of political risks, but few who can perform adequately in a limited insurance market," he cautions.
  2. Service requirements: Part of the selection process is conducting an analysis of what services the exporter requires. "Aside from the protection of assets," explains Cook, "these can include export financing, filing of applications, political risk intelligence, loss control and claims handling, contract and exposure review, and communication of coverage to divisions and subsidiaries." Commissions and fees should also be examined closely
  3. Combining risks: "Export pros should aim to combine various political risk exposures under one policy," Cook advises, "in order to maximize leverage in obtaining favorable terms and conditions and reducing premiums." Underwriters prefer "package" policies because these are typically more stable and predictable.
  4. Communication: Cook recommends the following procedures: 1) Set up in-house seminars to educate and inform employees. 2) Establish formal communication systems, including updates and weekly status reports. 3) Appoint local coordinators to familiarize themselves with the subject area and operating plan in case logistics presents problems. "Consider having brokers communicate directly with your firm's personnel to expedite information flow and provide support.
  5. Contract review: "A thorough review," says Cook, "includes analysis and review of contract, terms of sale and payment, and other documents related to exposure in order to assure proper coverage is obtained."
  6. Political risk intelligence: "As part of brokerage services, qualified facilities will assist in the area of information support and provide up-to-date intelligence on world conditions," Cook explains.
  7. Rates, Terms, Conditions: In addition to the 10 areas described above, Cook advises export pros to address the following: deductibles and coinsurance; waiting period; rescheduling; warranties and exclusions; method of reporting of exposures; coverage for business interruption and protection of profits; currency fluctuations; currency for claims payments; cost; premiums.
  8. Export credit: "Most political risk coverage excludes export credit," notes Cook. Export credit insurance, in addition to protecting against nonpayment, can be a sales tool because A/R is protected and banks are more apt to provide export financing.
  9. Loss control: "Measures to minimize loss can include analysis of the contract to further protect company interests by securing favorable treatment from the host nation," says Cook. Steps to further this include hiring host-nation personnel, seeking local financing, and developing rapport with local officials.
  10. Claims procedures: "Before a loss, written procedures should be developed addressing the who, what, when, where, and how of handling claims," says Cook. "Run drills, have meetings with key personnel, and institute procedures to arrange for arbitrators in the event of contractual or claims disputes."

Cook's The Ultimate Guide to Export Management is a superb all-around guide to the intricacies of exporting. At $99.95 (with discounts for bulk orders) its 592 pages of hands-on strategic advice is a must for any export department library. Cook presents complex material in a clear, concise format-whether the subject is cargo loss control, international customs services, trade finance, customer service, sales, the nitty-gritty of documentation and compliance, or a myriad of other export issues. Thomas Cook can be reached at 800-524-2493.

Political Risk Insurance Providers


  • FCIA Management Co. (now part of the Great American Insurance Group, authorized through the US Export-Import Bank):
  • OPIC (Overseas Private Investment Corp.- only insures assets located in nations with "favorable trade relations" with US):


(Sources: Thomas Cook, Managing Exports)

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