Opinion: Political risk insurance could encourage more investments into developing countries

ENS Africa, one of Africa’s largest law firms, explains why and how political risk insurance (PRI) could drive more investment into developing countries.  ENS’s integrated insurance practice group, ENSureAfrica, also examines key legal considerations for managing PRI across different jurisdictions.

The article was prepared by the following team of experts from ENS Africa: Rob Scott (executive consultant for insurance and dispute resolution, South Africa), Zara Sher (executive for insurance and dispute resolution, South Africa); Geoffrey Muchiri (insurance and dispute resolution, Kenya); Phillip Karugaba (insurance and corporate, Uganda); Désiré Kamanzi and Eustache Ngoga (insurance and corporate, Rwanda); and Patricia Jane Mumuni (insurance and corporate, Ghana).  

Political risk insurance (PRI), which serves to protect assets and financial interests, offers a safeguard against adverse actions or inactions of governments and serves to mitigate and manage risks arising from such actions.

As a risk mitigation instrument, it serves to foster a stable platform for investments into developing countries, and to facilitate access to investment finance.  It is a specialised (generally standalone) insurance product, often being a bespoke product, tailored to cover a risk/particular risks or address specific concerns pertinent to a particular jurisdiction.

PRI generally provides protection against government actions, such as expropriation (including forced abandonment and divestiture), political violence (losses due to war including civil war, civil unrest and terrorism), currency inconvertibility and transfer restrictions, contract frustration, licence cancellation and non-honouring of arbitral awards.

Some PRI insurers now extend coverage to a non-traditional more modern range of risks, for instance climate and environmental related risks (as climate/environmental risks are now regarded as also impacting on political risk and stability).  As such the PRI landscape is evolving.

Both public and private entities offer PRI.   Public entities include multilateral institutions such as the Multilateral Investment Guarantee Agency (MIGA) or bilateral entities such as government agencies (for example export credit agencies) as well as private entities managing PRI on behalf of their respective governments.  Private entities include, in the main, global insurance/reinsurance companies, Lloyd’s of London syndicates, and specialised underwriting agencies.  These entities are situated mainly in London, New York and Bermuda (being the world’s leading insurance hubs).

PRI is now regarded as an essential tool for facilitating and supporting foreign direct investment into less-developed countries in order to foster sustainable development and the achievement of sustainable development goals. It serves an important role in derisking investments where actual or perceived political instability discourages capital investments. While PRI’s impact has been sizeable, its potential for encouraging investment and facilitating trade remains substantially untapped.

The role of PRI in developing countries

In April 2025, the United Nations Conference on Trade and Development (UNCTAD) published a report entitled ‘Derisking Investments for Sustainable Development Goals: the role of Political Risk Insurance’. The report examined the role of PRI, more specifically in relation to developing countries and least-developed countries.   The report concluded that PRI has “a critical and potentially growing role to play in fostering investment towards developing countries and least-developed countries (LDCs) in particular” (to aid in the achievement of sustainable development goals and reduce the financing development investment gap in developing countries between capital required and actual funds currently invested).

It is reported that the financing development investment gap in developing countries has widened from US$2. 5 trillion to approximately $4 trillion per year between 2014 and 2023, and that in Africa, PRI is equivalent to a mere 18% of foreign direct investment (FDI).

The analysis in the UNCTAD report emphasises the importance of PRI as an investment derisking tool. The report is part of a broader and ongoing research project aimed at providing policy recommendations by 2026. The intended purpose of the recommendations is to assist PRI insurers overcome existing challenges and barriers, in order to enhance and expand the provision and use of PRI.

Barriers to the provision and use of PRI

While the analysis in the UNCTAD report centres on public PRI providers (although also acknowledging private PRI providers), the report identified a number of challenges/barriers to the provision and use of PRI.

The report also made certain initial recommendations which call for providers of PRI to enhance its impact in the attainment of sustainable development goals. The challenges/barriers identified in the report are:

• Increasing and emerging risks: This is due to rising global instability, political tensions, trade wars and climate change.
• Complexity and cost of PRI products: The report identified that outdated conditions and restrictive policy wording do not reflect the evolving needs of investors. The report calls on PRI insurers to adopt more dynamic pricing mechanisms.
• Lack of awareness: Many investors remain unaware of the benefits and availability of PRI, this stemming from the perception that PRI products are complex or only relevant to large multinational corporations.
• Sustainability standards (ESG): There is no single, universally adopted standard. As such, investors must navigate a fragmented landscape, which discourages investment.  The report emphasises that PRI insurers, and particularly public institutions, are well positioned to contribute to bridging the standards gap, and that they can, by leveraging their unique mandate and public trust, establish and promote uniform best practices.
• Multi-level collaboration: Investors seeking to mitigate political risk in volatile markets often face challenges due to fragmented and inconsistent offerings from multilateral, bilateral, public and private providers.  There is a need for stronger co-operation between these various entities, which can, by pooling their resources, avoid missed opportunities.

The initial recommendations made (for and to PRI providers), to a large extent emphasising a need to evolve/modernise the PRI landscape, are:

• Tailoring PRI offerings to address new global risks that hinder investment, including those related to climate change and supply chain vulnerabilities related to geopolitical uncertainties.
• Streamlining processes and reducing costs to make PRI more accessible and attractive to investors.
• Increasing awareness and education about PRI to expand its reach.
• Implementing common sustainability standards to align PRI frameworks with global goals.
• Enhancing their collaboration with multilateral development banks (MDBs) and development finance institutions (DFIs).

In summary, while the PRI landscape is evolving, its potential for encouraging investment and facilitating trade remains substantially untapped. What is encouraging (regard being had to the UNCTAD Report) is that not only has PRI’s enabling role in the quest to bridge the continent’s financing investment development gap been spotlighted, but that a documented way forward to expand its role has also been proposed to PRI providers (but in essence to all stakeholders).

Importantly, this proposal will become improved and supplemented, hopefully in the course of this year, after further research and engagement with all stakeholders (ideally also taking into account the views and perspectives of both private PRI providers and investors).

Consideration of legal aspects in operational management of PRI in jurisdiction

Insurers are necessarily circumspect and cautious in their risk assessments generally, particularly in relation to their political risk assessments, and certainly where risks are situated in developing countries. While African countries hold unique assets/riches and strategic minerals to allow the continent to substantially (arguably) reduce its financial investment gap, political risks are a key obstacle to investment in Africa.

Amongst numerous considerations, insurers’ risk assessments would necessarily also include considerations relating to the operational management of PRI covers in the jurisdiction of the risk/on the ground, more particularly in relation to how well placed they are to carry out this function. Given that PRI cover can remain in effect for up to 15 years, insurers/reinsurers must necessarily plan for effective long-term management in the host country.

The operational management of PRI covers on the ground necessarily include numerous aspects of a legal nature, requiring or favouring a need for local counsel involvement and assistance, whether in the context of placement, claims or otherwise. A list of illustrative (but not exhaustive) aspects are:

• Input and guidance on policy wording (with emphasis on clarity and content), including contribution to product development – PRI often being a bespoke product.
• It might be mentioned here that there is a dearth of legal precedent on political risk insurance, such that there are few legal cases from which guidance generally might be sought.
• Specifically in the context of country risk, the interpretation and understanding of local insurance regulations (and local regulations generally), advices on regulatory risk and compliance (regulatory law in jurisdictions on the continent often perceived as a mine field), and input in relation to anticipated regulatory changes and pending legislation.
• The assessment, investigation and verification of an insured’s compliance with local laws, regulations and licences. This is of particular importance in sectors such as extractives, energy and telecommunications, where licensing regimes are often complex and subject to ongoing compliance obligations. Local counsel can conduct real-time reviews of an insured’s regulatory standing, identify any pending enforcement actions or disputes with government authorities, and assess whether any non-compliance might provide a host government with a pretext for adverse action that could later be characterised as a legitimate regulatory response rather than a political peril.
• Advices on compliance with contractual agreements entered into between an insured and a host government, inclusive of:
• Assistance in managing a crisis, minimising damages, and exploring resolutions without triggering the policy (often referred to as the “waiting period”). Local counsel can play a vital role here, as they are able to engage directly with government officials, regulatory bodies and other in-country stakeholders. They are often best placed to assess whether a dispute can be resolved through negotiation, to identify the appropriate government official, and to advise on appropriate approaches to engagement.
• Advices on matters such as contract frustration, forced abandonment/divestiture, the unlawful calling of guarantees and currency inconvertibility/transfer restrictions.
• The sourcing of local experts in relation to various issues, for instance a host government’s stability, expropriatory events (including indirect or creeping expropriation) and generally in relation to a particular political system.
• Assistance and input in relation to risk assessments and the carrying out of due diligence exercises relative to a particular insured or underlying transaction/project.
• Advices on structuring and placement of cover/aligning PRI scope with the investment structure, financing and risk profile, as also on any restriction/limits in the context of the host country.
• In relation to claims and recoveries:
• Assistance with claims management and advices on strategies to be adopted taking into account host governments’ behaviours/culture.
• The collection of information from an insured and other parties of all relevant and available evidence (inclusive of correspondence between an insured and a host government/counter-parties, investment contracts, permits/licences and local law compliance records) – generally the collection of all relevant factual matrix evidence underlying a claim and/or loss.
• Input/advices in relation to the determination of the validity and coverage of the claim including the assessment of causation (whether the facts leading to a loss are commercially or politically driven given that the identification of political perils may not be a straightforward exercise, and that it may be even more difficult to date the occurrence of and to prove a political peril).  The question of the validity and coverage of the claim (or more often, the exclusion of cover) would be of equal relevance and importance to assets insurers (and not only to political risk insurers).
• Assessment of, and investigation into, the insured’s compliance with policy conditions, such as compliance with claims notification requirements and steps taken by an insured to protect property from political perils, and in particular political violence.
• Assistance in relation to determining what was known to the parties (both actually and tacitly) at the time of contracting/who caused the loss.
• Damages sustained, including both computation and proof thereof.
• Assignment, subrogated recoveries, salvage, the enforcement of rights in terms of a bilateral investment treaty, inclusive of advices on/an assessment of the likelihood of a recovery and the extent thereof. Where disputes proceed to international arbitration, whether under bilateral investment treaty mechanisms or otherwise, local counsel can serve as an essential bridge between international arbitration counsel and the on-the-ground factual matrix.

It is in the context of the operational management of PRI covers in the jurisdiction of the risk/on the ground, that well established and experienced local counsel (in the jurisdiction of the risk and on the ground), have an important and significant role to play.

We at ENS, Africa’s largest law firm, have 12 of our own offices, on the ground in Africa, located in Ghana, Kenya, Mauritius, Namibia (three offices), Rwanda, South Africa (four offices) and Uganda. Our dedicated and integrated Insurance Practice Group, ENSureAfrica, is well positioned to be of assistance and value to all parties that have insurance interests and investments on the continent, and particularly in the jurisdictions in which we have our own offices.