In today’s world, the relevance of credit insurance is hardly a controversial topic. Credit insurance emerged in in the 19th century, dealing with the risk on default on a monetary obligation in contracts where there is a time gap between compensation and the delivery of a good or service — typically sales on credit, where the conveyance of goods precedes payment of said goods or services. (In the above example, the risk that the buyer will not pay for the goods they have received.) The insurer’s role is therefore to compensate a creditor for damages arising from such default.

By and by, credit insurance proper and surety became autonomous entities. The distinction between both is clear. So, credit insurance is taken out by the insured themselves, who become the policyholder (creditor to the underlying obligation), the potential cause of claims (the debtor) being a third party. Surety insurance is a contract celebrated on behalf of a third party, where an insured (creditor of the underlying obligation) is a third party and the potential cause of a claim (debtor) is the policyholder.

In addition to this structural criterion, others allow us to distinguish between credit insurance and insurance as surety. While a surety deals solely with commercial risk (default on a contract obligation, chargeable to the debtor), credit insurance focuses on other, complex and heterogeneous risks, so called extraordinary risks — which, occurring both unpredictably and beyond the debtor’s control, affect or impede compliance with the obligations that underlie an insurance policy.

Among such extraordinary risks, usually covered by credit insurance, you will find catastrophic risk (arising from natural causes, such as earthquakes, floods, storms, and more), economic and financial (forex risk, for example), and political risk, connected with decisions by public bodies.

Now, one of the economic potentials of credit insurance materializes as support to export activities. In effect, as sales on credit are prominent across international trade, export companies are exposed to highly significant risk that, once importers have received their goods, they won’t disburse payment within the agreed time window. The same danger is there for rendering services to international customers or investing abroad. In this context, political risk becomes especially relevant.

Political risk as a phrase is somewhat imprecise. As we stated, both with credit insurance and sureties risk lies with delays or default in monetary obligations by the pertinent debtor. So the adjective, political, means not risk itself but the causes behind it or, in other word, the factors that originate a claim. So political risk is the kind that materializes as arbitrary or discriminatory decisions made by a foreign government, its bodies, or political groups, outside the debtor and creditor’s control. Affecting the territorial and geopolitical context surrounding the debtor, they hinder payment of the monetary obligations covered by insurance.

Multiple examples exist of political risk coverable by credit insurance. Among them, one might list: political powers interfering with transactions; cancellation of export or import licenses; embargoes on imports or exports (even outright bans of certain goods); scarcity of currency in the importing country’s banking system (currency retained to satisfy public debt) or deciding that national currency cannot be exchanged; moratoriums imposed by political power, i.e., a government decision whereby payment for imported goods is suspended or delayed; decisions on nationalization or expropriation, including confiscation and commandeering; border cancellation; political violence (war, insurrection, coups, martial law, terrorism, rioting, social unrest, and more); political instability; international sanctions, including from the EU or the UN on the importing country, and more.

Inherent in credit insurance, political risks embody vast heterogeneity, complexity, and unpredictability, for which reason they require monitoring by insurers and are rated in accordance with the country subject to coverage.

In conclusion, the relevance of political risk to international trade, given the uncertainty it represents and its potentially grievous effects, demands mitigation. To that end, credit insurance constitutes the most effective, adequate solution, at least concerning short-term credits (up to a year). As to the remainder, where political risk involves a greater degree of unpredictability, cover solutions often include export credit agencies, public insurance schemes or government backstops, which provide stimuli to exports.