Blockchain and Political Risk Insurance

Political situations are a constant in a company’s life, as are technological innovations. Sometimes political upheavals change the shape of the world, consider the Arab Spring, or Brexit, for example. In order to survive, companies have to intelligently operate through rapid reversal of fortunes and the more ambitious ones are actively looking for ways to master them in order to survive. However, enterprises can actually enter markets with insurance against political risks, especially in regions with a high density of untapped population. Since the very process of verification of documents and subsequent insurance payouts can be complicated and time-consuming, technological innovations such as blockchain are playing an increasingly big part in simplifying matters.  

Implications of Political Risk to Companies

It is not just companies that have operations in regions of conflict which are affected by adverse political situations. Sometimes the ruling political party in a stable democracy publicly criticizes certain companies leading to the drop in stock price of that firm. Wars impact the firm value as well, especially of a company related to the defense sector, or are perhaps in the travel and tourism company.

Even something less dramatic than wars and terrorist attacks can pose a risk to companies, such a rise in tax, or a political sanction that bars commercial ties with certain nations.

How can Insurance Companies Measure Political Risks?

It can be measured on a macro or a micro basis. Micro looks at the risk of a company going abroad, and macro looks at how risky the country is. One can refer to country risk indexes to understand that and go through the business risk environment index. The Wall Street Journal, for example, collaborates with the Heritage Foundation to come out with “the index of economic freedom” every year. It gives a fair idea of how free a country’s trade is, how frequently regimes are changed, and the rate of inflation, among other metrics.

How can Companies Protect themselves in the face of Political Unrest, and how could this have an Impact on Emerging Markets nearby?

A lot of people are interested in political risk particularly these days in view of situations in east Europe and the Middle East. One type of political risk mitigation is an insurance that is offered by banking intuitions. Take for example the Multilateral Investment Guarantee Agency (MIGA), an initiative by the World Bank in Washington. It has reported a marked increase in request for investments that have been made or are about to be made in Ukraine and countries nearby. Investors in these countries are concerned about energy supplies which could be at risk as a result of the clash between the Russian Federation and Ukraine.  

The types of risk that could be covered by insurance are expropriation, war, civil disturbance and terrorism, currency inconvertibility and transfer restriction, or even breach of contract between companies and government ministries.

Companies that can seek Political Risk Insurance

Banks top the list. Banks make two types of loans among others – one is loans made to ministries to finance emerging markets. These would be covered by a protection pertaining to non-honoring of sovereign financial obligations. The second is banks granting loans directly to companies to finance their projects. Such projects in emerging markets are often funded by commercial banks which can be protected by insurance.

Another category eligible for political risk insurance is manufacturing companies who often build facilities or expand existing facilities. They make investments in equities for that and even take intercompany loans.   Other companies could be oil and gas companies, infrastructure companies involved in the water sector, roads, ports, airports, the transportation sector, education, health, even hotels.

Benefits of Blockchain in Insurance

Blockchains are decentralized, distributed ledgers that are revolutionizing the way the insurance industry has worked thus far. Its benefits can be categorized into two divisions:

Its short-medium term benefits include,

i) Automation – Smart contracts would effectively enhance speed, transparency and cost efficiency, especially in the case of parametric insurance products. Smart contracts function of predetermined programmes, and in an insurance structure would enable quick payouts in certain events. The automatic approval of claims also reduces fraud and unnecessary delay.  

ii) Distributed databases – Blockchains can improve the insurance infrastructure by minimizing human error and the expenses and delays incumbent to the verification processes. Reconciliation and synchronization of multiple databases economize time.  

The Medium – Long-Term Benefits of Blockchain to Insurance are,

i) P2P business models – Blockchain can enable the scalability and transparency of business models like P2P insurance. DLT would provide the necessary framework for organizations that operate of self-regulation and automation – traits that would instill trust in an ecosystem that demands cooperation between non-trusted partners

ii) Risk transparency – Many start-ups are exploring near-real-time adaptive pricing, hybrid insurance products, and on-demand insurance. These companies are also leveraging big data, AI and the IoT. Blockchain would enable the secure storage and sharing of data pouring from these new sources to increase the efficiency of risk assessment and pricing.

Need Political Risk Insurance

If there is anything that takes one by surprise is the sudden and unexpected ways the political situation of a country undergoes radical change. While it is in the interest of insurance companies to keep an eye on the markets in potentially volatile regions, it is more important for the companies in the private sector who are considering investments in those countries to be proactive in inuring themselves. Blockchain companies such as California-based HashCash Consultants are being roped in by insurance firms looking to cut down on operational costs, and to circumvent unnecessary delay in verification procedures. HashCash Consultants provides blockchain solutions that operate on HC NET and ensure transparency, reliability, and cost efficiency to the insurer and the insured.

Enterprises should keep in mind that what is stable today might not be stable tomorrow, and it is crucial for business interests to protect themselves in the event of instabilities or situations where their investments could be at risk.