Managing Uncertainty: Political Risk Insurance

One of the fundamental principles of finance is that with greater risk comes the possibility of greater returns. This can certainly be true for companies looking to invest outside of the markets that they are familiar with, such as in the fast-growing economies of certain developing regions. Unfortunately, the downside to this strategy is the need to manage the uncertainty and potentially disastrous consequences of political risk.

The Multilateral Investment Guarantee Agency, a member of the World Bank Group, defines political risk as the negative consequences arising from the adverse actions or inactions of governments. These risks are often unpredictable and hard to quantify.