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Political vs. Policy Risk: Understanding How Insurers Can Help with Emerging Energy Transition Challenges

Nathan Maggiotto

Governments play a pivotal role in shaping the energy transition. Policy interventions, like tax credits and regulatory incentives, are essential to drive the sector-wide transformations needed for a greener economy. However, with a critical election approaching in the US, concerns about "political risk" have surfaced among businesses and investors. Many worry that a change in administration could bring new or revised policies, potentially undermining investments in renewable energy and related sectors. Given this emerging risk, a key question arises: Can insurers provide solutions to mitigate these concerns?


In this article, I aim to distinguish between "Political Risk" and "Policy Risk" to clarify where the insurance industry can offer protection—and where it cannot.



 

What is Political Risk? 

  

Political Risk is a broad term, but in insurance, it refers specifically to products that protect businesses from adverse government actions (or inactions). These can include expropriation (asset seizure), political violence, currency inconvertibility, or breaches of contract by government customers (known as “contract frustration”). Essentially, Political Risk Insurance (PRI) helps manage the financial impact of unexpected, discriminatory government actions on foreign investments. PRI emerged post-World War II, primarily to protect Marshall Plan investments, and has since evolved into a standard product offered by both government-backed and private insurers.


For example, if a foreign government nationalizes a foreign investor’s assets without due compensation, a PRI claim would likely be triggered. Insurers can issue this coverage because recovery paths exist through contracts with dispute resolution language or international commercial treaties, allowing pursuit of compensation for expropriation.

  

 

What is Policy Risk? 

  

Policy Risk is the risk businesses face due to changes in public policy. Unlike Political Risk, which arises from government actions like expropriation, Policy Risk stems from regulatory shifts that impact business operations. For example, an electric vehicle (EV) manufacturer that has made long-term investments based on federal tax credits to boost consumer demand for EVs could face significant financial challenges if these credits are rolled back, affecting projections and ROI.

  

Although both Political and Policy Risk involve government actions, the key distinction lies in the "police powers of the state." Under international law, states have the right to regulate in the public interest. Thus, regulatory changes like tax adjustments or environmental regulations may not be compensable, whereas expropriation is generally compensable under most international agreements.


 

Can Insurers Cover Policy Risk? 

  

As politics in many developed countries becomes more polarized, investors increasingly ask whether Political Risk Insurance can cover Policy Risk. The answer is typically "no," though, as in much of insurance, it depends. Political Risk Insurance protects against significant government actions like expropriation, where recovery paths exist through arbitration or international dispute resolution treaties—not the regulatory changes that define Policy Risk.


That said, the potential for insurers to address certain aspects of Policy Risk isn’t entirely off the table. The key is understanding the nature of the insured event, its likelihood, and the possibility of legal recovery. If these align, an insurer might underwrite Policy Risk—but likely at a premium reflecting the anticipated loss and recovery profile.

  

 

Conclusion 

  

As we move toward a greener economy, the energy transition requires both government support and private investment. However, increasing political uncertainty surrounding environmental policies presents challenges for businesses. While Political Risk Insurance offers protection against severe government actions, Policy Risk—such as the rollback of EV incentives or renewable energy subsidies—often remains outside the scope of traditional insurance solutions. To address this, businesses must be clear and specific in their concerns and work closely with insurers to determine whether their risks are insurable—and at what cost.


For example, an investor concerned that EV infrastructure incentives might be withdrawn could ask an insurer whether the loss of a particular revenue stream would be covered. While the answer might be “no” in most cases, the key lies in a precise understanding of the risk. Only by honing in on specific risks can insurers and businesses collaborate effectively to manage emerging uncertainties in the energy transition.

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