A world of trouble for political violence insurers

The political violence insurance market, which covers businesses against damage caused by strikes, riots and civil commotion, is bracing itself for further strife after July’s riots and looting in South Africa, as the uneasy truce created by the pandemic begins to fray in countries where discontent has simmered since violent demonstrations erupted in 2018 and 2019.

Disorder has picked up again as controls are lifted. Lockdowns imposed to contain the pandemic helped governments put a lid on rolling waves of popular protests. But the causes of the unrest that made 2019 a record-breaking year for political violence remain: poverty, inequality, widespread feelings of social marginalisation and political alienation.

If anything, the pandemic has intensified these grievances, as well as creating a few more for good measure, believes Claudine Fry, principal of global risks analysis at Control Risks.

“Covid-19 has become a focus for some anti-government, civil liberties and conspiracy groups, while the methods used to contain and manage the pandemic are a trigger for protests and unrest. It has weakened government authority in some countries and created new sources of conflict,” Fry said.

“The situation is very volatile,” said Richard Halstead, line underwriter for war, terrorism and political violence at Hiscox London Market. “Covid will increase the risk of political violence further, against a backdrop of increasing geopolitical risk over the past decade.”

Chris Kirby, global head of political violence and terrorism at specialty MGA Optio, is expecting “a protracted period of civil unrest globally”. New environmental and anti-capitalist movements are likely to further fan the simmering resentments, while social media is also playing a big part, he added. “People are able to communicate and launch different movements much more easily. This brings a new dynamic.”

Democracy in crisis
Even before the pandemic struck, global dissatisfaction with democracy was already at a record high, according to a report published last year by Cambridge University’s Centre for the Future of Democracy. Many large democracies – including the US, UK, Brazil, Mexico, South Africa, Colombia, and Australia – were witnessing their highest levels of civic discontent since the 1990s, while others, like Japan, Greece and Spain, were close to all-time highs, the report stated.

A spontaneous wave of protests in countries across the world from Algeria to Bolivia, the US to France and Hong Kong in the past three years has led to rising political violence insurance claims that “have tested the risk appetite of many carriers”, said Kirby. “For some markets, the riots in South Africa were the first sustained losses they’d had in 20 years and that can be quite unnerving for markets that write ‘benign’ books and would not expect attritional losses.”

That political violence underwriters are faced with a steady stream of claims is evidence of how the market has “now come of age”, said Halstead.

But July’s rioting in South Africa, in which 200 people died in the worst civil unrest in the country since the end of apartheid, has resulted in heavy claims on the political violence market, with certain Lloyd’s syndicates particularly hard hit.

South African riots cause huge loss
Sasria, the state-owned South African insurer that covers domestic strikes, riots and civil commotion (SRCC) claims, has said its bill from the rioting will be ZAR32bn ($2.2bn), but that all claims settled above Sasria limits, along with uninsured losses, would total ZAR50bn ($3.5bn), making it the biggest insured riot loss on record, higher even than the Chilean riots and the US Black Lives Matter disorder, it said. Sasria is reinsured by the Lloyd’s market, while business interruption risks not covered by the state insurer are also placed there.

That will create “differences within the political violence market that will challenge underwriters”, Halstead said. Some players will be nursing big claims, others will be relatively lightly affected, while some will be completely unscathed, he explained.

Overall, the market is strong though, said Kirby. “There is sufficient capacity and appetite to get most business placed. New players coming in with large line sizes are going to bring a new dynamic, which will benefit the buyers but will be a double-edged sword for brokers and the existing markets.”

The big South African loss has helped to temper the increasing competition, however, said Halstead. “Our worry was that the new capacity coming in could push rating down again, but we’ve seen discipline maintained as a result of South Africa.” While rates are largely flat, there are wild fluctuations in countries where there have been losses. Prices in Chile are under pressure, but “that’s because the rates there were at a very high level following the losses in 2019”, whereas on “certain South African business, rates have gone up tenfold”, Halstead explained.

The next shoe to drop
The question everyone is now asking is: where will violence flare next? “While there will always be a degree of unpredictability to outbreaks of unrest, there are persistent signs that political risk is rising,” said Fry. Control Risks uses several indicators to gauge the threat level, including a country’s inflation rate, its level of political activism and local protest groups’ capability to foment disorder along with its government’s popularity and legitimacy, as well as keeping close tabs on any specific events that could trigger unrest.

“We closely monitor many countries to better understand which should be on the shortlist. But that shortlist is a pretty long list now,” admitted Halstead. In states where conditions are like a tinderbox, it only takes a small spark to ignite conflict – the jailing of a disgraced but still-popular politician, a public transport fare rise and fuel price hikes triggered demonstrations and violence in South Africa, Chile and Haiti respectively.

“We have realised as a market that the threat of SRCC or terrorism are as likely now in a major western city as they are in a major African or Asian city,” argued Kirby. “The variables are the effectiveness of first responders and security, the cost of repairs or cleanup, and the availability of materials to get a location up and running to minimise loss of revenue. Yet the spread of the base rate applicable to different countries has narrowed and rating is now more comprehensive than ever before.”

Control Risks’ Fry said: “Countries we are watching closely this year include many of those that experienced unrest in 2019, including Chile, Lebanon and France, as well as Thailand, Belarus, Colombia and Brazil.”