It has long been argued that international law guarantees reimbursement to a foreign investor whose investment has been expropriated by the host State, even if such expropriation was carried out to serve public good. With the advent of bilateral investment treaties (BITs), and there are almost 3,000 such treaties today, there is no longer any doubt that most countries are obligated to compensate an injured foreign investor. But host state guaranteed compensation creates socially perverse incentives for foreign investors to invest in risky industries, to favor litigation over settlement and causes regulatory chill as governments decide to pull back social, environmental and other regulatory schemes out of fear of being sued by the investor in international arbitration.
In this presentation I will discuss the possibility of abolishing host state guaranteed compensation, and replacing it with political risk insurance instead. Political risk insurance is already available to investors from various sources, including government-backed insurance providers, private insurance companies and international organizations such as the World Bank. My research shows that political risk insurance can protect the investor at least as well as the BITs. But insurance should be preferred because, among other advantages, insurers can better control the moral hazard problem – that is, the fear that the investor would invest in excessively risky industries or will submit to expropriatory acts instead of fighting them – by adjusting the insurance premiums depending on the risk profile of the project. Moreover, by shifting focus to political risk insurance, governments would be incentivized to improve the domestic investment climate by making its regulatory framework more predictable.
Light refreshments will be provided during each session.