IX

Political Risk Insurance

From: Principles of International Investment Law (2nd Edition)
Rudolf Dolzer, Christoph Schreuer
Content type: Book Content
Published in print: 15 November 2012

Product: Oxford Scholarly Authorities on

International Law [OSAIL]
ISBN: 9780199651795

Subject(s):
Settlement of disputes Overseas Private Investment Corporation (OPIC) International organizations
Multilateral Investment Guarantee Agency (MIGA) Law of treaties BITs (Bilateral Investment
Treaties) International economic law Insureds violation of the insurance contract

From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber:
Chinese University of Hong Kong; date: 06 January 2016

(p. 228) IX Political Risk Insurance

The risk for the investor inherent in major investment projects has led to the evolution of a market
for investment insurance schemes.1 The first phase of insurance programmes commenced in the
1950s and was entirely dominated by insurers run by national governments, which sought to
promote the outgoing investments of their nationals. In the United States, the Agency for
International Development carried out the task until the Overseas Private Investment Corporation
(OPIC) took over in 1971. In the early 1970s, private insurers entered the market, beginning with
Lloyds in London and the American International Group (AIG) in New York. In 1985 the member
states of the World Bank decided to establish an international organization, the Multilateral
Investment Guarantee Agency (MIGA), for the same purpose. The Inter Arab Development Bank is
charged primarily with underwriting investment insurance on the regional level.2
The purpose of national programmes is tied to the promotion of the national economy. Often,
protection is granted only to national companies and their projects in countries friendly to the
investors home country. Covered risks are usually expropriation, non-convertibility of currency,
and political violence. OPIC, for instance, covers matters of expropriation, non-convertibility, and
losses due to war, revolution, insurrection, and civil strife.3
Some of the national programmes are subsidized, such as the German one, while others such as
OPIC in the United States purport to act without a burden to the taxpayer. The creation of the MIGA
was prompted, according to its Preamble, by the recognition that the flow of foreign investment to
developing countries would be facilitated and further encouraged by alleviating concerns related to
non-commercial risks.
Private companies entered the investment insurance market on the assumption of higher efficiency
and an acceptable margin of profit. In its original context and design, the private programmes
emerged as extensions of traditional forms of marine insurance.
Private insurers seek to diversify their own risk by schemes of mutual cooperation with other
companies and also by leveraging their operations by reliance on reinsurers. They have the
advantage, vis--vis the public sector, of being able to (p. 229) tailor their products to the needs of
the individual company insured. They can price and accept or reject risk based on commercial
considerations and are able to act speedily and flexibly. According to an agreement among private
insurers (Waterborne Agreement), they exclude nuclear risks, but will otherwise underwrite war risk
on a controlled basis as part of a political risk account and now routinely insure against terrorism,
although this risk is often supported by government-backed reinsurance. Private insurers do not in
practice cover the risk of currency devaluation or depreciation.
The strongest difference between private and public insurers concerns the time horizon of the
insurance offered: whereas the public sector has been prepared to offer coverage for up to 20
years, private companies typically limit their risk by offering protection for much shorter periods.
While some private market political risk insurers offer coverage for up to 15 years, others limit
themselves to much shorter periods, sometimes only for three years, subject to renewal.
The existence, side by side, of these actors presents a unique panorama of competitive and
complementary services by the private sector, national governmental agencies, and international
actors. Expectations held previously that the activities of the private sector might obviate or crowd
out the need for the service of public institutions turned out to be unrealistic, at least over the past
decades. Some government agencies, notably OPIC, seek to cooperate with the private sector and
not just to compete with it. The result is often coinsurance and reinsurance.
To some extent, governmental insurance programmes reflect foreign policy goals of the
government especially as regards eligibility of projects. Also, major types of investment risks have
remained so difficult to assess in mathematical terms or so risk prone that private insurers have
decided not to cover them. Thus, national insurance agencies work in a hybrid manner, reflecting
principles of prudent private risk management but also governmental characteristics.

From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber:
Chinese University of Hong Kong; date: 06 January 2016

As for competition between domestic insurers, private and public, and MIGA, they differ in their
willingness to accept various types of risk and offer different rates for different packages of
insurance. Altogether, overlapping elements exist among the policies and activities of the different
insurers, and the divergences are explained by the different goals and institutional settings. The
various existing regimes diverge in part in regard to the types of investment covered. Exports are
covered by MIGA if they contribute significantly to a specific investment.4 Activities of the host
state when acting as a purchaser, supplier, manager, and creditor are excluded from coverage by
OPIC.5 MIGA is only prepared to insure an investment that satisfies its understanding of economic
soundness and has received host country approval.6 The rules of MIGA do not, however, require
specific standards of protection of foreign investment in the host country. This is because MIGA
only insures (p. 230) risk in MIGA member countries where there is a bilateral agreement between
MIGA and the host government.
It has been the general practice of government insurers to conclude agreements with host
countries that provide for subrogation. This means that the investors rights against the host
country are assigned to the insurer upon payment under the insurance contract. Some countries,
such as Germany, include clauses to this effect in bilateral investment treaties (BITs), whereas
others, such as the United States, conclude specific agreements for this purpose. In Germany,
governmental insurance will only be granted for investments in countries that have concluded a BIT
with Germany or in which a similar degree of legal security exists.
With regard to the types of risk covered, these are similar to those addressed in BITs. Beyond the
protection of assets, most programmes offer protection against non-compliance with contracts.
Also, the risks of currency inconvertibility and restrictions on currency transfer are covered. Of
course, all schemes provide for protection against direct and indirect expropriation, and some
government insurers, for example OPIC, and most private insurers also cover cases of business
interruption. Remarkably, the MIGA Convention in Chapter III, Article 11(a)(ii) specifically provides
that no loss is covered arising from non-discriminatory measures of general application which
governments normally take for the purpose of regulating economic activity in their territories. Risks
of war and civil disturbance are generally covered. OPIC (and most other government insurers and
the larger private sector underwriters) will not cover projects that violate international
environmental standards, create unreasonable health risks, or fail to respect human rights, in
particular workers rights.7
Concerning protection of non-compliance with contracts, repudiation or breach is covered by MIGA
if the holder of the guarantee does not have access to a judicial and arbitral forum or the decision
of such a forum is not rendered within a reasonable period as defined by MIGA, or such a decision
is not enforced.8 Non-payment of an obligation under an arbitral award may constitute an
expropriation as understood in international law and as covered by an insurance contract, even if
the host country considers that it is not able to pay the amount due under the arbitral award.9
Disputes have arisen between insured investors and the insurer when the two sides have
disagreed on the interpretation or application of the insurance contract. Typically, such disputes
are resolved through arbitration provided for in the insurance contracts. Often, the resulting
decisions deal with legal issues that appear (p. 231) similar to those that arise in the relationship
between the host state and the investor in the context of a BIT. For instance, the investor may claim
that its treatment by the host state amounts to an indirect expropriation as covered by an
insurance contract.
In a number of disputes, tribunals set up under insurance contracts have addressed legal issues of
expropriation, currency inconvertibility, breaches of contract, the consequences of political
violence, and attribution. Some decisions of these tribunals set up under insurance contracts have
been relied upon in disputes between investors and states.10 The authority of arbitral awards
rendered under insurance contracts to disputes between states and foreign investors will depend,
not least, on whether the provisions in insurance contracts and the standards of protection in
treaties and customary international law are the same.

From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber:
Chinese University of Hong Kong; date: 06 January 2016

Footnotes:
1 According to a report published in 2009, only 14 per cent of the total global flow of foreign direct

investment is covered by insurance, see MIGA Report, World Investment and Political Risk (2009)
34.
2 See I Shihata, Regional Investment Insurance Project (1972) 6 J World Trade Law 185.
3 See USC 2194.
4

Commentary on the Convention Establishing the Multilateral Investment Guarantee Agency

(1986) 1 ICSID Review-FILJ 193, 201.
5

See Art 4.03(b) of the OPIC Contract of Insurance Against Inconvertibility, Expropriation, Political
Violence (Form 234 KGT 1285, 2nd rev), reprinted in R D Bishop, J Crawford, and W M Reisman,
Foreign Investment Disputes (2005) 517, 519.
6

See Convention Establishing the Multilateral Investment Guarantee Agency, Arts 12(d) and 15.

See generally M Perry, A Model for Efficient Aid: The Case for Political Risk Insurance Activities of
the Overseas Private Investment Corporation (1996) 36 Virginia J Intl L 511 ; see USC 22, 2199
et seq.
8

See MIGA Convention, Ch III, Art 11(a)(ii).

See eg MidAmerican Energy Holdings Company v OPIC, citing the Restatement (Third) of
Foreign Relations Law (1999), 712, cmt h and the Harvard Draft Convention on the International
Responsibility of States for Injuries to Aliens; an excerpt of the case is reprinted in D Bishop, J
Crawford, and M Reisman, Foreign Investment Disputes (2005) 563 et seq. But see also the
position that non-payment of debts will not amount to an expropriation (Waste Management), p
129.
10 The Award in Revere Copper v OPIC, Award, 24 August 1978, 56 ILR (1980) 258, is often cited in

the context of defining an indirect expropriation.

From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2015. All Rights Reserved. Subscriber:
Chinese University of Hong Kong; date: 06 January 2016