Global companies are finding it ever harder to buy coverages for political violence in Latin America, after a spate of episodes of social unrest in the past couple of years.
Countries like Chile and Colombia have gone through a period of polarised politics that have been exacerbated by the Covid-19 pandemic, and insurers have reacted by restricting coverages accordingly.
“In Chile, after the troubles of October 2019, the cover for vandalism acts has disappeared,” said David González, chief insurance officer at Spanish construction group Sacyr. “It is the consequence of a punctual incident but it shows that we are in a period where some covers have been restricted to an extent that they are no longer available for some Latin American countries.”
Mr González referred to a series of episodes of social unrest that engulfed Chile in late 2019, which quickly evolved from manifestations against price increases in Santiago’s metro system, to broader protests against social injustice and economic inequality that often turned violent.
The violent nature of the protests caught the insurance community by surprise, as Chile was widely seen as the most stable Latin American market.
Early this year, another market darling, Colombia, was also overwhelmed by episodes of social unrest, as millions of people took to the streets to protest against social inequality. The protests also often deteriorated into violence, affecting the ability of buyers to purchase the covers they need.
“For several years we have purchased a specific strikes, riots and civil commotion cover for our businesses in Colombia. It is included in our terrorism policy and covers social disturbance and other events. Social unrest covers that were available in P&C policies don’t provide the scope of coverage that we need,” said Jorge Neto, insurance manager at Portuguese retail group Jeronimo Martins.
“We have also noticed the hardening of the market for those covers. We have been able to purchase the same wording as before but with a higher price,” he added.
The proliferation of episodes of social unrest has reinforced a trend among P&C insurers to exclude such risks from their policies, forcing buyers to go to specialty markets, where prices tend to be higher. Buyers have therefore had to look for covers in the specialty market, often buying strikes, riots and civil commotion (SRCC) standalone covers, or extensions to political violence and terrorism policies.
It is an evolving market though. Underwriters are constantly fine-tuning their products to respond to fast-changing conditions. Some of the current hotspots for this kind of insurance, such as Chile, did not have a domestic market for the product, and for that reason legislation is still evolving there.
“We have certainly got the wordings in place to be able to deal with this (trend),” said Chris Kirby, global head of political violence and terrorism at broker Option, during a recent webinar organised by law office DAC Beachcroft. “But their enforceability under various different laws and jurisdictions sometimes raises questions.”
For example, there may be disagreements between the different underwriters on whether the loss is covered by reinsurance. In such cases, the payment of claims may be affected. However, several Latin American countries have insurance laws that are very protective to buyers. That is the case in Chile, noted DAC Beachcroft lawyer Maria Jesús Pérez in the same webinar.
In any case, Mr Kirby stressed that the market is striving to adapt itself to the changing needs of buyers in the political violence field.
“When you look at the products available, they cover physical damage and business interruption due to physical damage,” he said. “There are some add-ons like denial of access and customer and supplier extensions.
“In Latin America, specifically, the coverage that is usually bought is a combination of sabotage, terrorism and SRCC. The wordings have changed slightly over time,” he added.
Later wordings have become more descriptive, with a higher number of exclusions and conditions, while perils are defined in a more specific way. Buyers often ask for denial-of-access extensions, as well as coverages for looting, particularly in sectors like retail in urban areas, Mr Kirby pointed out.
“We have seen looting as a big contributor for the claims that have been paid out after the Chilean riots of 2019,” he said.
The use of specific coverages for damages suffered during episodes of social unrest also raises issues of interpretation, as definitions of what constitutes a riot, a civil commotion or a terrorism act can vary and buyers are sometimes surprised to learn that the coverages they chose do not match the perils that caused the damage.
Mr Kirby mentioned a famous case, some years ago, when a buyer that had a terrorism policy in Thailand suffered damages during an episode of social unrest that was described by local politicians as acts of terrorism. But the underwriters did not agree with the definition and the courts were in line with them, denying indemnification to the insured.
Mr Neto stressed that the difficulties faced by buyers nowadays are a reflex of a difficult market environment that is changing fast.
“The market is dynamic and is getting more responsive. Ten years ago, when there was a big loss event, the answer of the market was diluted in the course of the time. But nowadays, the answers are immediate. We feel them in the subsequent renewal,” he said.
“Social unrest episodes are complex social events that are hard to understand. We do not have control over them. We must monitor the situation and manage the risk closely; and, if possible, adjust our insurance policies accordingly,” Mr Neto concluded.