TL;DR
- The Middle East conflict is creating political risk exposures for SA businesses that extend far beyond companies with direct Middle Eastern operations.
- Sanctions compliance complexity, oil price volatility, supply chain disruption, and diplomatic positioning are all creating commercial losses that standard insurance does not cover.
- SA companies trading with the Middle East, importing through Red Sea-dependent supply chains, or exporting to regions affected by conflict spillover should assess their political risk exposure.
- Political risk insurance covers contract frustration, currency inconvertibility, political violence, and trade disruption that standard business insurance excludes.
- The cost of political risk cover is typically modest compared to the potential exposure, but it must be arranged before the risk materialises.
Table of Contents
Political Risk Is Not Just for Companies Operating in the Middle East
When SA business owners hear “political risk insurance,” most think of mines in the DRC, infrastructure projects in Nigeria, or agricultural operations in Zimbabwe. Political risk feels like something that affects companies with physical assets or contractual commitments in politically unstable countries.
The Middle East conflict is changing this. SA businesses with no direct Middle Eastern operations are finding that conflict in the region creates exposures in their own supply chains, customer relationships, financing arrangements, and trade routes. The transmission mechanisms are indirect but financially real.
Four categories of SA businesses are exposed to Middle East-related political risk without necessarily recognising it:
1. Importers dependent on Red Sea shipping routes. If your raw materials, components, or finished goods come from Asia and previously transited the Suez Canal, you are affected. Route changes, transit delays, and freight cost increases are not covered by standard marine or business insurance. They are consequences of a political event, armed conflict disrupting a major trade route.
2. Exporters with Middle Eastern buyers. SA manufacturers, mining companies, and agricultural exporters with buyers in Gulf states or broader Middle Eastern markets face payment risk that goes beyond normal commercial credit. Sanctions screening delays, government-imposed capital controls, and conflict-related banking disruptions can freeze payments for weeks or months.
3. Companies in conflict-adjacent supply chains. SA businesses that supply components to companies with Middle Eastern operations, or that depend on inputs from suppliers with Middle Eastern exposure, inherit political risk through their supply chain. A Tier 2 supplier to a European defence contractor, for example, may find that export controls or sanctions affect their ability to ship products that contain dual-use components.
4. SA companies expanding into East and North Africa. The political risk environment in Kenya, Tanzania, Mozambique, and North African markets is influenced by Middle Eastern dynamics, including Iranian and Gulf state activity in the Horn of Africa, Red Sea security conditions, and the broader realignment of trade relationships caused by the conflict.
Sanctions Compliance Is Creating Commercial Losses for SA Companies
The sanctions landscape related to the Middle East conflict is complex, multi-layered, and rapidly evolving. SA businesses are caught in the middle not because they are sanctions targets, but because the compliance machinery around sanctions creates friction in legitimate commercial transactions.
How sanctions affect SA companies that are not sanctioned
SA businesses do not need to be dealing with sanctioned entities to experience sanctions-related losses. The problem is the compliance process itself. International banks (particularly correspondent banks that process cross-border payments in USD) apply enhanced due diligence to transactions with any nexus to the Middle East. This includes:
1. Payment delays. Cross-border payments involving Middle Eastern counterparties or transiting Middle Eastern banking infrastructure are subject to additional screening. The R22 million payment delay I described at the start of this article is not unusual. SA exporters report payment delays of 30–90 days on transactions that previously cleared in 5–7 business days, purely due to sanctions compliance screening.
2. De-risking by correspondent banks. Some international banks have reduced their appetite for processing transactions with certain Middle Eastern or North African counterparties, regardless of whether those counterparties are sanctioned. This “de-risking” behaviour forces SA businesses to find alternative banking channels, often at higher cost and with less certainty.
3. Supply chain compliance requirements. SA companies that supply into global supply chains serving the Middle East may face enhanced compliance requirements from their customers—requests for sanctions certifications, end-user declarations, and supply chain mapping that create administrative burden and contract delays.
The insurance gap
Standard trade credit insurance covers buyer insolvency and protracted default (typically 90–180 days non-payment). It does not cover payment delays caused by sanctions screening, government-imposed banking restrictions, or correspondent bank de-risking. These are political risk events, and they require political risk insurance to cover.
The distinction matters commercially. A buyer who is solvent and willing to pay, but whose payment is blocked or delayed by a sanctions compliance process, falls outside the scope of trade credit insurance. Political risk insurance that covers “inability to transfer funds” or “government-imposed payment restrictions” can fill this gap but only if it is in place before the delay occurs.
How Oil Price Volatility Transmits Political Risk to SA Businesses
Middle East instability affects global oil markets, and oil price movements transmit directly into the SA economy. SA imports approximately 70% of its crude oil requirements, with a significant portion sourced from or priced relative to Middle Eastern benchmarks.
For SA businesses, oil price volatility driven by Middle East conflict creates exposures that are rarely identified as political risk but behave exactly like political risk events:
1. Transport and logistics cost spikes. SA trucking, freight, and courier companies face fuel cost increases that contract pricing may not accommodate. A R3-per-litre diesel increase sustained over six months can turn a profitable logistics contract into a loss-making one. This is not a normal market fluctuation, it is a consequence of political instability in oil-producing regions.
2. Input cost inflation for manufacturers. SA manufacturers using petroleum-derived inputs (plastics, chemicals, lubricants) face raw material price increases that cannot be passed through to customers on fixed-price contracts. A petrochemical processor who contracted to supply packaging at R12 per unit finds their input costs at R15 per unit because of conflict-driven oil price spikes.
3. Exchange rate pressure. Higher oil prices increase SA’s import bill, which puts downward pressure on the Rand. A weaker Rand increases the cost of all USD-denominated imports, creating a secondary political risk transmission mechanism that affects every SA business trading internationally.
Political risk insurance does not typically cover oil price movements directly. But contract frustration cover (which protects against the inability to perform contractual obligations due to political events) can provide protection where conflict-driven cost increases make contract performance economically impossible. This is an area where the boundaries of political risk insurance are being tested by current events.
Supply Chain Disruption as a Political Risk Event
The Red Sea shipping disruption is the most visible example of how Middle East conflict disrupts SA supply chains, but it is not the only one. SA businesses are experiencing supply chain disruptions that trace back to the Middle East conflict through multiple channels.
1. Rerouting costs and delays. Vessels rerouting via the Cape of Good Hope add 10–20 days to Asia-Europe and Asia-Middle East voyages. SA importers sourcing from Asia face extended lead times and higher freight costs. SA exporters using Middle East transhipment hubs find their cargo rerouted through alternative ports with different handling standards and transit times. These are not market forces, they are consequences of armed conflict.
2. Component shortages from Middle Eastern suppliers. SA manufacturers who source specialised components from Middle Eastern suppliers (petrochemicals, aluminium, glass, and fertiliser intermediates from Gulf states) face supply disruptions when conflict affects production or logistics in the region.
3. Insurance market hardening. The Middle East conflict has contributed to marine and political risk insurance market hardening globally. SA businesses face higher premiums, tighter terms, and reduced capacity for marine insurance and political risk cover. This is a meta-risk, the conflict makes the insurance itself more expensive and harder to obtain, at exactly the moment when the underlying exposure is increasing.
SA’s Diplomatic Positioning and Sovereign Risk for SA-Origin Goods
South Africa’s diplomatic positioning on the Middle East conflict (particularly the ICJ genocide case against Israel and SA’s stance at the UN) has generated international attention. For SA businesses, this diplomatic positioning creates a category of risk that is difficult to insure but important to understand.
SA-origin goods and SA-owned businesses operating in certain markets may face enhanced regulatory scrutiny, informal trade barriers, or reputational risk related to SA’s diplomatic positions. While formal trade sanctions against South Africa have not been imposed, the commercial environment is more complex than it was before SA took a high-profile stance.
Political risk insurance can cover some dimensions of this, contract frustration by foreign government action, licence cancellations, and discriminatory regulatory treatment. But reputational risk and informal trade barriers are harder to insure. SA businesses with significant exposure to markets where SA’s diplomatic positions may create friction should factor this into their broader risk assessment, even if a specific insurance product does not exist for every scenario.
The Gap Between Trade Credit Insurance and Political Risk Insurance
SA businesses frequently confuse trade credit insurance with political risk insurance, or assume that one covers everything the other does not. In the context of the Middle East conflict, understanding the boundary between these two products is critical.
Trade credit insurance covers commercial risks: buyer insolvency, protracted default, and in some cases, pre-shipment risk (buyer cancellation). It protects against the buyer’s inability or refusal to pay for commercial reasons.
Political risk insurance covers sovereign and political risks: government action that prevents payment (currency inconvertibility, transfer restrictions), contract frustration by government entities, expropriation, political violence, and trade embargo. It protects against the political environment preventing a willing buyer from completing a transaction.
The Middle East conflict creates scenarios that sit on the boundary:
1. A buyer in a Gulf state is solvent and willing to pay, but the central bank has imposed temporary capital controls. Political risk trade credit will not cover.
2. A buyer defaults because conflict has destroyed their market and they are insolvent. Trade credit standard insolvency claim.
3. A buyer’s payment is delayed 60 days due to sanctions screening by correspondent banks. Grey area may not be covered by either product without specific endorsement.
4. An SA exporter cannot ship goods because the destination country has been placed under a trade embargo. Political risk contract frustration by government action.
SA businesses with Middle Eastern trade exposure should review both their trade credit and political risk programmes to map exactly where one ends and the other begins. A broker who arranges both products can identify the gaps and structure cover that eliminates them subject to underwriting and insurer appetite.
What Political Risk Insurance Actually Covers
Political risk insurance is a specialist product arranged through international markets, primarily Lloyd’s of London and specialist political risk insurers. For SA businesses with Middle East-related exposures, the relevant coverage categories include:
1. Currency inconvertibility and transfer restriction. Covers the insured’s inability to convert local currency into hard currency or to transfer funds out of the host country due to government action. This is directly relevant to SA exporters with receivables in Middle Eastern currencies where capital controls may be imposed.
2. Contract frustration. Covers financial loss when a government entity or government action prevents performance of a commercial contract. This includes licence revocations, embargo imposition, and regulatory changes that make contract performance illegal or impossible.
3. Political violence. Covers physical loss or damage to assets and business interruption caused by war, civil war, terrorism, insurrection, and related perils. For SA companies with assets in or near conflict-affected areas, this is the most direct form of political risk cover.
4. Expropriation. Covers the seizure, nationalisation, or confiscation of assets by a government entity. Includes “creeping expropriation” a series of government actions that progressively deprive the investor of the economic benefit of their assets without a formal seizure.
5. Trade embargo and sanctions cover. Some political risk policies can be structured to cover losses arising from the imposition of trade embargoes or sanctions that prevent the insured from completing transactions. This is a developing area of coverage directly relevant to the Middle East conflict, subject to the insurer’s own sanctions compliance obligations.
The cost of political risk insurance varies by country, duration, amount insured, and the specific risks covered. For SA businesses, premiums typically range from 0.5–3% of the insured value per annum, depending on the exposure profile. Compared to the potential loss from an uninsured political event, this is modest but the cover must be in place before the event occurs. Political risk insurance placed after a crisis has begun is either unavailable or priced to reflect the elevated risk.
Frequently Asked Questions
Do SA businesses need political risk insurance if they do not operate in the Middle East?
Potentially yes. Political risk exposures from the Middle East conflict extend beyond companies with direct Middle Eastern operations. SA importers dependent on Red Sea shipping routes, exporters with buyers in conflict-affected or sanctions-adjacent markets, and companies in supply chains with Middle Eastern nodes all face political risk exposures. The question is whether these exposures are significant enough to warrant specific cover like a broker assessment can quantify this.
What is the difference between trade credit insurance and political risk insurance?
Trade credit insurance covers commercial risks, buyer insolvency and protracted default for commercial reasons. Political risk insurance covers sovereign and political risks, government actions that prevent payment, contract performance, or asset use. In the Middle East context, a buyer who cannot pay because their government imposed capital controls is a political risk event, not a trade credit event. SA businesses with Middle Eastern trade exposure often need both products, coordinated to avoid gaps.
Can political risk insurance cover losses from sanctions compliance delays?
Some political risk policies can be structured to cover losses arising from sanctions-related payment delays or trade restrictions, subject to the insurer’s own sanctions compliance framework. This is a developing area of coverage. The key distinction is between being sanctioned (which is generally uninsurable) and suffering loss because the compliance process around sanctions delays legitimate transactions (which may be insurable). Discuss the specific scenario with a broker who specialises in political risk placement.
How does oil price volatility relate to political risk insurance?
Political risk insurance does not typically cover commodity price movements directly. However, if conflict-driven oil price spikes make it impossible for a party to perform contractual obligations (contract frustration), or if government actions related to oil market intervention affect SA businesses (import restrictions, price controls, subsidy removal), political risk insurance may respond depending on the specific policy wording. The boundary between market risk and political risk is being tested by current Middle East dynamics.
When should SA businesses arrange political risk insurance for Middle East-related exposures?
Before the exposure materialises. Political risk insurance is priced and available based on the insurer’s assessment of future risk. Once a crisis has begun (sanctions imposed, capital controls announced, conflict escalated) the cost of cover increases dramatically or becomes unavailable. SA businesses should assess their Middle Eastern exposure now and arrange cover while the market is willing to write it at reasonable terms. Waiting until a specific event makes the news is the most expensive approach.
Get Your Political Risk Exposure Assessed Before the Next Escalation
If the Middle East conflict is affecting your supply chains, trade payments, or commercial relationships (even indirectly) your political risk exposure needs a current assessment. Contact Berkley Risk or call 011-702-8250 to arrange a political risk review structured to your trade routes, customer base, and supply chain exposure through our Lloyd’s market access subject to underwriting and insurer appetite.
Berkley Risk (Pty) Ltd arranges/places/co-ordinates insurance with licensed insurers. This article is general information only and does not constitute legal, financial, or regulatory advice. All cover is subject to underwriting acceptance and final policy wording.
