Innovation in Political Risk Insurance: Experience from the Multilateral Investment Guarantee Agency
| Published date | 01 September 2017 |
| DOI | http://doi.org/10.1111/1758-5899.12480 |
| Date | 01 September 2017 |
| Author | Merli Margaret Baroudi |
Innovation in Political Risk Insurance:
Experience from the Multilateral Investment
Guarantee Agency
Merli Margaret Baroudi
Director of Economics and Sustainability, MIGA
Abstract
The Multilateral Investment Guarantee Agency (MIGA) is the youngest of The World Bank Group’s four financial institutions,
but it has a long history of innovation in its mandated sphere: political risk insurance and credit enhancement. MIGA’s mission
is to foster cross-border investment flows to support development, with the goal of eradicating poverty and enhancing shared
prosperity in emerging market and developing economies. The path to accomplishing this mission has, however, been contin-
ually evolving. This article provides a discussion of the: (1) contextual backdrop to innovation for a multilateral financial institu-
tion providing political risk insurance; (2) the importance of political risk insurance and the traditional coverage provided; (3)
the expanded capability to de-risk private investments as seen through the lens of innovation at MIGA; and (4) a conclusion
on the continuing importance of innovation in a changing global environment.
The shifting environment for cross-border
investment and development finance
Current trends in financial flows and donor community pri-
orities are creating an environment that is increasing MIGA’s
relevance to private and public sector stakeholders. Capital
flows to emerging markets have been subdued over the last
five years, and foreign direct investment (FDI) as a percent
of world GDP has generally been declining over the last
decade, but FDI flows to emerging and developing countries
have remained positive and more stable than other capital
flows to these economies (Figure 1).
Going forward, the environment for investment flows to
emerging and developing economies is uncertain, in part a
reflection of heightened policy and political risk in advanced
economies. Triggers in advanced economies, such as a
repricing of risk or an increase in protectionism, could create
more uncertainty and volatility that could cause cross-border
investors to pull back further from these markets. Moreover,
weaker growth in advanced economies (or in large emerg-
ing market economies) could also curtail the flow of foreign
direct investment. To the extent that the environment for
cross-border flows is challenging, there is a strengthened
role for political risk insurance and credit enhancement
products.
Increased awareness by donor countries of the benefits of
investment insurance and guarantees compared with more
traditional forms of financial support is another driver of
change. In part this reflects constraints on development
assistance budgets in donor countries, as guarantee and
insurance instruments are coming to be seen as more effi-
cient financial vehicles than direct grants or loans from the
public sector, thereby potentially delivering more ‘value-for-
money’for taxpayers (see, e.g. Humphrey and Prizzon,
2014). In addition, the importance of the private sector in
driving sustainable development –and how public funds
can be used to crowd-in the private sector to do so –is
gaining ground in the capitals of many donor countries.
Guarantees have become increasingly relevant as emerg-
ing and developing economies seek assistance in accessing
private financing rather than solely traditional development
loans. Moreover, the scale of many projects is beyond the
ability of the multilateral development banks to finance
directly. Hence, instruments like guarantees that can lever-
age external resources are increasingly seen as necessary to
scale-up development assistance.
Importance and kinds of political risk insurance
It is important to place the political risk insurance (PRI)
industry into perspective. Many investors and lenders under-
stand the benefits of investing in emerging markets and
developing economies. At the same time, they also appreci-
ate the importance of mitigating the political risks that may
accompany an investment in these markets. Although many
project and investment risks can be addressed by conduct-
ing thorough due diligence, others may be more challeng-
ing to handle. These may include some commercial risks
and also some non-commercial or political risks. Political risk
insurance is a tool to help investors and lenders reduce the
probability or severity arising from the adverse actions or
inactions of host governments. PRI can help draw investors
into difficult operating environments by giving greater
assurance that losses will be recovered, thereby providing a
©2017 University of Durham and John Wiley & Sons, Ltd. Global Policy (2017) 8:3 doi: 10.1111/1758-5899.12480
Global Policy Volume 8 . Issue 3 . September 2017
406
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