Captive solutions for uncertain geopolitical times

AXA XL has bound its first political violence cover with a captive insurer, helping companies find innovative risk transfer solutions for an unpredictable geopolitical landscape.

The fallout from Covid-19 and the war in Ukraine is fertile ground for civil unrest. High prices for food and energy, economic hardship and fragile political institutions have set the stage for conflict and political instability around the world over the coming months and years.

Global political risk is at its highest level in five years, according to political risk analyst Verisk Maplecroft. Forty-eight countries in its Civil Unrest Index registered a significant increase in risk, the biggest-ever annual rise recorded in the index, while 26 countries in its Conflict Intensity Index saw a sharp uptick.

There have been more than 400 significant anti-government protests across 132 countries since 2017, according to the Global Protest Tracker from the Carnegie Endowment for International Peace. This year has already seen unrest in Latin America, Africa and Europe, adding to recent protests and riots as far afield as Sri Lanka, Hong Kong, South Africa, Chile, the Netherlands and Italy.

Game changer

Following surprise losses in recent years, insurers and reinsurers are increasingly looking to exclude strikes, riots and civil commotion (SRCC) cover from property policies, leaving SRCC risks to the specialist political violence and terrorism market. However, faced with an evolving geopolitical landscape, the political violence and terrorism market has itself become more restrictive.

The conflict in Ukraine was a game changer for the market. The loss to the war, terrorism and political violence market is estimated at between $1.5bn and $5bn, far in excess of the market’s annual premium base. The true cost, however, remains unknown, as loss adjusters have been unable to visit affected sites in the conflict zone. The longer the conflict lasts, the more likely it is that claims are translated into total losses.

While further civil unrest is almost certain in 2023, pinpointing the next hotspot is almost impossible. Amid a cost-of-living crisis, simmering socioeconomic pressures in both developing and mature markets could boil over at any time. This year saw unrest in the run up to Nigeria’s elections in February, while in Europe a fatal train crash in Greece sparked riots in March. Plans to reform pensions led to a fresh round of strikes and protests in France, while the Turkish government faces growing protests over its response to recent earthquakes, ahead of a key general election in the summer.

Demand outstrips capacity

This heightened risk environment is also playing out in the political violence insurance market. While capacity remains relatively robust, underwriters have reduced line sizes and restricted cover for certain perils and countries, including those affected by the conflict in Ukraine and rising tensions between the US and China. Wide-ranging international and national sanctions also prohibit insurance and reinsurance cover for Russia and Belarus.

Drivers affecting the political risk insurance market are also supporting strong demand for political violence insurance, which covers a broad range of property damage perils, including war, civil war, terrorism, insurrection, revolution, coup d’état, strikes, riots and civil commotion. According to the PWC 2023 Global CEO Survey, geopolitical risks are seen as the third-most concerning threat for the next five years, behind macroeconomic volatility and inflation.

Historically, political risk insurance was often considered an ancillary cover, but is now regarded by many companies as a key component of their property protection. The cover is also essential for project financing, where lenders and investors may require insurance when supporting large long-term construction, infrastructure and renewable energy developments in countries exposed to geopolitical or local security risks.

Captive solutions

Captives offer sophisticated buyers a potential solution in the current challenging market conditions for political violence and terrorism insurance. Captives can be used to finance higher retentions and mitigate price increases in the market. A captive insurer can also enlarge the scope of cover or potentially plug gaps, providing solutions for hard-to-insure perils and territories.

We are now seeing growing interest from clients in using captives to finance political violence coverages, and recently bound our first such policy with a captive insurer. The client’s captive wrote 100% of the primary insurance layer and the first excess layer, while AXA XL provided fronting services and additional excess capacity.

Political violence is a diversifying risk for captive insurers and can optimise capital. But it is also a highly specialist risk to underwrite. By its nature, political violence losses are volatile and loss experience data is limited, requiring companies to use scenarios to assess potential losses and price cover.

Deep dive

In this challenging market, AXA XL has been supporting clients with flexible programme structures, as well as exploring potential captive solutions. Companies will also benefit from a more robust assessment of their exposures and take a deeper dive into their schedule of values. When pricing risk and allocating capital, underwriters are paying more attention to local exposures and whether appropriate security and risk management measures are in place.

Given the current geopolitical outlook, conditions in the political violence market are unlikely to improve significantly in the foreseeable future and could even deteriorate if the market experiences significant losses. However, by working with insurers and advisors, buyers can optimise available capacity and coverage. Captives are a natural part of the solution.

Contributed by Marine Charbonnier, head of captives and facultative underwriting, APAC & Europe, AXA XL, and Laure Augugliaro, senior underwriter, crisis management and special risks, France, AXA XL.