Conceptualizing Political Risk Insurance: Toward a Legal and Economic Analysis of the Multilateral Investment Guarantee Agency (MIGA)
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Over the last decade, there has been, especially among legal academics, an enormous expansion of scholarly attention to investor-state arbitration under bilateral investment treaties (BITs) and regional trade agreements. At the same time, very little research or analysis has been devoted to stabilization clauses but much less still to political risk insurance (PRI), another means of protecting the expectations or value of the original contractual bargain between the state and the investor against political or regulatory changes. While it is true that only a minority of investments, including through public contracts, are currently covered by political risk insurance, the political risk insurance market is growing rapidly. Even though there has been an explosion in the number of BITs, at least until recently major economic powers such as Brazil and China have shown little interest in investor-state arbitration under BITs as a means of investor protection despite their significant share in global inbound and outbound investments. Political risk insurance is expanding into new areas (such as coverage of default on sovereign debt obligations); the industry has survived well the financial and economic crisis. Several factors have led to exceptional demand for political risk insurance products, including political crises such as the Arab uprising in the Middle East, global risk perceptions following the global financial crisis of 2008, and the European sovereign debt crisis. As MIGA's 2011 Annual Report indicates, “Over the past five years, the rate of growth of political risk insurance has exceeded that of foreign direct investment, meaning that a higher percentage of foreign direct investment is now insured for political risk.” At the same time, recently there has been evidence of a crisis with respect to BITs and investor-state arbitration, sometimes considered as "the legitimacy crisis of investor-state arbitration", most dramatically reflected in Argentina’s refusal to honor its ICSID obligation to pay promptly final awards against it and also in the denunciation of the ICSID Convention by several countries, including Venezuela. While host states have sometimes maintained that interpretations of their obligations by arbitral tribunals have been unduly expansionist with respect to jurisdiction, and have read substantive norms in such a way as to create significant constraints on the legitimate exercise of political sovereignty, investors have been concerned by the inconsistency between different awards dealing with the same issues, as well as the apparently obscure or sparse reasoning in many awards, which leads to uncertainty about the extent and nature of the rights they enjoy under the system of BITs. Both host governments and foreign investors increasingly perceive the BITs' protection as expensive and unpredictable, and there is a need to explore alternative solutions. Several years ago, one of the few leading economists to address the question of protection of foreign direct investment, Joseph Stiglitz, suggested that achieving investor-state protection through the hand-tying of host states by treaty obligations was not generally economically efficient, and that third-party insurance ought to replace BITs as the predominant approach to investor protection. Stiglitz in fact may have underestimated the extent to which existing political risk insurance products cover in effect a similar set of political events as are addressed under the obligations in most BITs. Typically insurable risks include expropriation, restrictions on transfers and convertibility, war and civil disturbance, and breach of contract. MIGA expropriation claims, which will be discussed later in this article, tend to involve a direct mandate from the government as part of its policy unlike other institutions that may involve indirect expropriations as well. While denial of justice or lack of fair and equitable treatment are not generally insurable risks, the fact is that many of the underlying political events that have triggered BIT claims including under fair and equitable treatment provisions of BITs would arguably also trigger, under one or other of the provisions of a typical political risk insurance contract, a valid insurance claim by the investor. (Admittedly, this is an anecdotal impression; it would be a useful exercise to take a data base of BIT claims over the last decade and see to what extent the same claims would have been valid insurance claims under a typical PRI contract.)
Source Publication
Transnational Law of Public Contracts
Source Editors/Authors
Mathias Audit, Stephan W. Schill
Publication Date
2016
Recommended Citation
Chalamish, Efraim and Howse, Robert L., "Conceptualizing Political Risk Insurance: Toward a Legal and Economic Analysis of the Multilateral Investment Guarantee Agency (MIGA)" (2016). Faculty Chapters. 839.
https://gretchen.law.nyu.edu/fac-chapt/839
