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Intro: Hello, and welcome to Insured Success, a podcast brought to you by Reed Smith's Insurance Recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist. 

Emily: Hello, listeners, and welcome to the Insurance Success Podcast. My name is Emily McMahan, and I am an associate in the Global Commercial Disputes Group at Reed Smith in London. 

Laura-May: And I'm Laura-May Scott, a partner in the Disputes Group at Reed Smith in London. 

Katherine: And lastly, I'm Kat Ellena, an associate in the Insurance Recovery Group in Los Angeles. Today, we're going to talk about a key insurance in a business's armory, political risk insurance. We will also be considering this type of insurance in the context of elections. Emily: So this year, over 60 country citizens have gone to or are going to the polls to exercise their electoral rights, dubbing 2024 the super cycle election year. As we know, political change brings about uncertainty and therefore increased risk for organizations operating from or doing business in those affected countries. This is where political risk insurance can step in to mitigate some of these risks experienced by organizations that are associated with political change. 

Laura-May: Exactly that. And for those experienced in insurance and risk management, political risk insurance isn't just a peripheral concern. It's a critical tool in strategic planning and operational continuity. This insurance serves as a crucial tool for mitigating uncertainties that arise from political shifts, which we often see are magnified during elections or political unrest. 

Katherine: So with that backdrop in mind, in the next 10 minutes or so, we will explore three things. First, what political risk insurance is designed to cover. Second, how this coverage could be triggered in light of this year's super cycle of elections throughout the world. And lastly, some practical considerations for risk managers and company executives alike when evaluating their company's risk profiles and insurance programs in respect of political risk coverage. 

Emily: Great. So let's start with setting out what exactly political risk insurance is. Political risk insurance is designed to cover a policyholder's financial losses and operational disruptions arising from political events, such as government changes, policy shifts, civil unrest, and geopolitical tensions. 

Katherine: That's right, Emily. and political risk insurance specifically provides coverage for risks like expropriation, political violence, currency and convertibility, and government contract breaches. During election periods in particular, these risks can become pronounced, which requires a proactive approach to risk management. 

Laura-May: Yes, and in an election context, the risk faced by companies is twofold. So we have immediate market reactions, where there's riots and civil unrest, which results in business interruption. And you also have long-term policy implications as a result of government policy changes, which can cause more permanent implications for businesses. So let's look at how coverage can be triggered by elections. So elections inherently introduce a level of volatility that can disrupt business operations and financial stability. For instance, the anticipation of regulatory changes or shifts in foreign policy can lead to market volatility, which can ultimately then impact investment decisions and corporate strategies. 

Katherine: Right. And as you can see, there are many types of political risks that can be addressed through political risk insurance. For many businesses, the most relevant types of coverage that could be called upon as a result of losses experienced due to election fallout would be business interruption, expropriation, or political violence coverage. However, organizations based in or with assets in traditionally less stable regions may also require political risk coverage for losses experienced due to, for example, forced abandonment of assets or forced divestiture from an affected location. 

Emily: So, turning to ex-appropriation, this type of cover caters to losses experienced due to government acts which interfere with fundamental ownership rights of the insurance investment in the relevant region, which include but are not limited to confiscation and nationalization. This can occur when the new government enacts policies or takes actions to confiscate assets of the insured or chooses to nationalize an industry previously run by privately owned businesses which the insured participates in. This cover can also address the ex-appropriation of an insured's funds by a new government which are held in a deposit account in the affected country. This type of cover can also be triggered if the new government imposes laws or restrictions that selectively and discriminately apply to a company or category of companies, which includes the insured. And political violence insurance provides cover for the insured's losses due to physical damage to investments and assets, usually located in a particular area, and where those losses have been caused by political violence, such as war, revolution, terrorism, insurrection, riots, strikes, sabotage. Such causes can emanate from an election or be in direct response to an election result. 

Katherine: So while ex-appropriation and political violence coverage may be triggered as a result of events following the election of a new government, the most likely type of political risk coverage that would become relevant in relation to an election cycle is business interruption insurance. Business interruption insurance provides coverage for financial losses experienced by the insured, which are caused by the insured's business operations having been interrupted by the covered political risk. So, for example, political tension surrounding an election could lead to rioting, looting, arson, and other violent acts that could force an insured's business to close or potentially lose revenue or suffer property damage. 

Emily: So, we will now discuss some examples to highlight why political risk insurance is an important consideration in light of this super-cycle election year. 

Katherine: That's right, Emily. So even in stable democracies, the election of new governments can produce losses for uninsured. Consider the 2016 United States presidential election and the election of Donald Trump. His tenure in office brought significant policy change, particularly in trade and foreign relations. Both U.S. and international businesses involved in global trade practices face new tariffs and regulatory hurdles. And these changes force companies to re-evaluate their risk management frameworks and in many cases increase their reliance on political risk insurance. In fact, there are legitimate concerns that should President Trump be re-elected this November, the U.S. could withdraw from international organizations like NATO, which would have widespread geopolitical consequences. There are also concerns regarding rioting and other public disturbances related to the U.S. Election this November. According to the U.S. Attorney's Office, the riots after the 2020 U.S. elections alone caused approximately $3 billion worth of damage. And the unpredictability of the upcoming U.S. Election this November emphasizes the necessity of robust risk management strategies. 

Laura-May: And political upheaval due to elections is not limited to the U.S. For example, according to the French government, the anti-government yellow vest movement in France in 2018 caused over 200 million US dollars worth of damages. Kenya also experienced significant rioting and violence following its general elections, most notably after the 2017 presidential election. That election, which took place in August 2017, resulted in widespread unrest due to allegations of vote rigging and irregularities. The results were in fact later annulled, which led to further tensions and violence. And the exact quantification of the total loss varies, but the financial impact of the 2017 post-election violence in Kenya was extensive, and it affected multiple sectors, and it slowed down the country's economic growth. 

Emily: So, as we have discussed, not only can elections result in short-term reactions, such as political violence or rioting, but can in turn result in longer-term shifts in government policy and regulation. Political risk insurance can help provide a buffer against the unpredictability of a new government's priorities following an election, which is why it is integral for companies to assess their exposure in this super cycle year and assess whether their current insurance suite is sufficient. 

Katherine: So now that we understand both what political risk insurance can cover and the potential impact elections can have on a business that could trigger losses which may need to be met by this type of insurance, let's discuss what companies can practically do to ensure they're catering to the risk posed by a super-cycle year. 

Laura-May: Companies should adopt a practical approach to managing political risk insurance during election cycles by undertaking comprehensive risk assessments. And this can be done internally at the business or through the engagement of external political analysts and risk consultancy firms who develop scenario-based evaluations, providing a spectrum of potential outcomes and their implications for the insured. 

Emily: And once a comprehensive view is established of your company's risk exposure to political risks, companies will also need to ensure that those risks are met, either through strategic business changes or mitigation measures such as insurance. Laura-May Scott: Yes, and tailoring a company's insurance policies to align with the specific risk exposure identified and the geopolitical landscape of a business is crucial. It's something that we always come back to when we're talking about insurance. Cover needs to be tailored to a business's risks. Insureds must adopt a multifaceted approach to risk management. And this involves not only securing appropriate political risk insurance, but also doing other things like diversifying investments, staying abreast of political developments, and continuously refining risk assessments based on emerging data and trends. 

Katherine: And given that one of the most common types of losses a business may face due to an election is business interruption, companies should specifically review their business interruption policies to ensure that it would respond to the risks identified by each individual business. 

Emily: So on that topic of business interruption, when you review your company's current business interruption insurance, we recommend that you consider the following questions. First, does access to the business's premises have to be entirely prevented, or is it sufficient that access is merely hindered to trigger cover? Second, are there any geographical limitations to cover that could limit the cover available? On that note, we recommend reviewing definitions such as vicinity or similar types of geographical terms. Third, are there any monetary thresholds, monetary deductibles, or time deductibles for accessing this cover? In other words, is there a period of time or an amount of loss that is for the insurer to account for before insurance kicks in? Fourth, what is the definition of damage and is it wide enough to cover possible losses? And lastly, consider definitions like the definition of civil unrest or other relevant terms that operate within the specific political risk cover. The political landscape is constantly changing, and with the increasing prevalence of disinformation and social media, there is a risk that losses experienced by a business due to an election may not fit neatly into some of the legacy language in a political risk policy. We recommend that businesses think creatively about what types of events emanating out of an election could give rise to losses to ensure they are appropriately covered. With that said, elections also present opportunities. A sophisticated risk management strategy encompassing diversification and comprehensive insurance coverage presents an opportunity for businesses to grow and prosper. 

Laura-May: Exactly that, Emily. Use the political landscape change to ensure that your business is appropriately covered from an insurance perspective. So in summary, political risk insurance is an integral component of strategic planning for businesses and investors, particularly during election periods. The volatility and uncertainty elections bring can significantly impact various sectors, and being equipped with robust risk management strategies is critical. 

Katherine: So what are some key takeaways for companies in this super cycle election year that can help ensure potential risks are identified and also mitigated? First, it's crucial to continue to stay informed on political developments, polling data, and potential policy changes in the regions affecting your business. Second, businesses should regularly evaluate the relevant political landscape and its potential impact on business operations. Thirdly, businesses should also ensure that they're diversified, and they can do that by spreading their investments and operations across different regions to mitigate localized potential risks. Finally, it's imperative that companies review their insurance programs, specifically their political risk coverages, to protect against significant uncertainties. We also recommend that companies speak to their insurance brokers who are well placed to ensure that any identified political risks are properly mitigated through the right insurance policies. But in addition to speaking to insurance brokers, businesses can also consider engaging other external experts, such as political analysts and risk assessment firms that can help develop an even more robust risk management strategy. 

Emily: Great. Thank you, Kat. And thank you, Laura-May. And thank you, listeners, for turning into this podcast. If you enjoyed this episode, please subscribe, rate, and review us on your favorite podcast platform and share your thoughts and feedback with us on our social media channels. 

Laura-May: Yes, indeed. That's all for now. Bye, everyone. 

Katherine: Thanks, everyone. 

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact insuredsuccess@reedsmith.com. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

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