Intense political instability, inequality, nationalism, pandemic and even climate change are fuelling strikes, riots and civil commotion risks around the world, from South Africa to Brazil. Meanwhile, terrorists’ tactics and targets are changing, with deadly armed attackers creating as much disruption as planted bomb “spectaculars”.
The changing risk profile of political violence and terrorism (PVT) is reflected in the evolving coverage now available to businesses to protect against property damage and loss of income.
Bomb attacks have a major impact in terms of property damage and also through the shock factor on the population, but problems for terrorists with purchasing and moving explosives, as well evading local intelligence and security services, have reduced their frequency.
Nowadays, “low-cost terrorism” by individuals randomly attacking people by means of handheld weapons or vehicles, like the 2016 truck attack in Nice, is more common than it used to be.
François Barriol, senior underwriter terrorism and political violence at Liberty Specialty Markets, says that despite a significant number of victims, such attacks result in little (if any) property damage. But major business interruption remains, which is not usually covered.
“In situations like Nice, the tourism industry was severely impacted. Hotels suffered a 10% reduction in attendance, but up to 25% reduction in turnover in the 30 days following the attack, despite it being the peak season. That’s the reason why many multinational companies with worldwide operations are more frequently integrating loss of attraction coverage into their programme,” he tells GRM.
Chris Parker, head of political violence and deadly weapon protection at specialty insurer Beazley, says that while the PVT insurance market’s emphasis is still on offering cover for physical damage to scheduled assets and the resultant loss of income due to the interruption of the insured business, clients are broadening their insurance coverage from sabotage and terrorism to full political violence.
“We are also seeing an increase in the number of clients purchasing deadly weapons protection and active-shooter coverage, especially in the US due to the increased number of mass shootings and the number of shooting deaths the country experienced in 2021,” he adds.
Deadly weapons protection insurance triggers without the need for any physical damage to an insured asset and will respond as soon as a weapon has been brandished, Parker explains: “The coverage is aimed at protecting people as well as physical assets, and combines an insurance policy with the services of a crisis responder who will help a client before, during and after a deadly weapons attack.”
According to Corinna Walter, terrorism underwriter at Liberty Specialty Markets, European businesses used to rely on protection against civil unrest or political violence that was included in all-risk policies. In Germany for example, insurers usually had smaller, localised events in mind, perhaps resulting in a few broken windows. “Riots and civil commotion, as we often experience them today, are characterised by greater violence and higher loss potential. Given the multiple examples of political violence and strikes, riots and civil commotion we see today, the demand for such coverage is growing, especially for companies with assets in riotous regions.”
In the French market, coverages granted under all-risks policies have been shrinking in the hard market, adds Barriol. Terrorism, riots and civil commotion, which used to be covered perils, are now regularly sub-limited or sometimes excluded.
Holistic coverage on offer
Tim Strong, head of international crisis management at Aspen Insurance, says the changing nature of terrorism means insureds need to make sure that they have suitable coverage in place. He says most terrorism products available in the market have a clear definition of terrorism – an act committed for political, religious or ideological purposes.
“But what happens if the assailant is killed during the attack and their motive(s) can’t be easily identified? For example, the motive behind the Mandalay Bay [Las Vegas casino] shooting in 2017 in which 60 people were killed is still not clear. Should this event be classified as terrorism? What was Stephen Paddock’s motive for the attack? The solution is to broaden the trigger on terrorism products to avoid any potential gaps in coverage,” he says.
Aspen developed a product, called Active Assailant, which responds to most physical attacks and provides a more holistic coverage solution, Strong says.
Beazley’s Parker expects to see a further increase in demand for the deadly weapons protection and active-shooter coverages, and believes that more insurance carriers will move into the space offering greater capacity and product choice for clients. “Market conditions remain similar to 2021, with increased demand for PVT insurance especially for emerging market risks, and plenty of available capacity to cover the demand,” Parker says.
PVT risk has moved up the risk agenda for European risks managers, according to Liberty Specialty Markets’ Barriol, and they’re eager to work collaboratively with underwriters and brokers.
“This proximity has given us the possibility to find specific solutions to industry or client-specific concerns. We have also been acting proactively to raise awareness about the volatility of those perils in all territories, in order to avoid receiving last-minute requests for cover in regions where the situation is already extreme, such as Ethiopia in mid-2021 and Ukraine at the beginning of this year,” Barriol says.
“We also notice an increase in submissions from middle-market companies, which weren’t used to buying such cover in the past and now feel concerned about such problems,” he adds.
The PVT outlook in developed economies isn’t good, as Liberty’s Walter points out, taking Germany as an example: “Trust in politics and the economy has suffered. Many companies are threatened with insolvency despite government aid, and the German economic recovery process is behind other European countries. This is leading to frustration and radicalisation among some groups of people, which is being discharged in demonstrations, sometimes accompanied by violent riots.”
Risky countries and renewal trends
Loss-making events in 2021, for example in Kazakhstan, Senegal, Colombia, Brazil and Myanmar, altered the renewal dynamic for Liberty Specialty Markets and its multinational company clients. One challenge was offering acceptable terms for long-term insureds who had losses or with a retail exposure in very risky countries, while ensuring the long-term sustainability of its offers.
The other was managing its war and political violence aggregates at an acceptable level, even for insureds with a good risk profile and no loss. Barriol says: “On various occasions, we suggested layering the most challenging PVT/war insurance programmes in order to offer an affordable capacity while mitigating insurers’ exposure. A huge effort was also made to integrate the PVT and war insurance programmes with both insureds’ captives and all-risks programmes. In the end, the large majority of accounts were renewed and some of the best risks even benefited from a rate reduction, so a hard market is not inevitable.”
Beazley’s Parker concurs that 2021 saw significant PVT loss activity, the largest loss being the South African riots in July. “At this stage we do not know the final quantum of the South African losses, but they will certainly be the largest loss this market has seen since the Twin Towers attack of 2001.
“The market also saw losses in other countries such as Senegal, Mali, Yemen, Lebanon, Myanmar, Chile and Colombia to name but a few. This has caused premium rates to increase for risks located in those affected countries – but overall the market pricing for PVT insurance remains stable,” he says.
UKRAINE WAR FALLOUT COULD SPREAD
Terrorism and political violence insurance is not intended to cover the type of full-scale war seen in Ukraine, and the cover only responds when relevant nations are not at war. But (re)insurers will likely incur some direct and indirect losses as a result of the conflict, despite the standard policy exclusions that exist for war and economic sanctions.
These provisions should limit liability for (re)insurers in some lines such as energy and marine. Other coverages, such as trade credit and political risk, typically do not contain these exclusions, according to a note from KBRA, a US ratings agency.
KBRA says higher claims could also develop from cyber risk, because the war in Ukraine has significantly changed the future cyber threat landscape: “While (re)insurers with eastern Europe exposure are more directly exposed to cyber claims, allies of Ukraine, as well as companies that cut ties with Russia, could become exposed in a scenario where sanctions against Russia are exhausted and the war shifts to cyberspace.”
Regardless of the line of business, ambiguous wordings may generate some litigation and associated costs for (re)insurers, KBRA adds.
Addressing the effect of sanctions, while no (re)insurer has yet voluntarily ceased underwriting Russian oil and gas exposures, energy bans may force such an outcome, KBRA says. “However, avoiding a more proactive stance on the war’s humanitarian crisis may cause reputational damage to the insurance industry over the medium term. Moreover, a protracted and intensified conflict may cause unpredictable ripple effects across other business lines and domiciles.”