How insurers are responding to rising political risks
Today's businesses are increasingly exposed to political risks of all types including riots, civil unrest, strikes and terrorism attacks.
In our fast-changing world powered by social media, where a call to action around a common cause can be sent from one or a few smart devices to all corners of the earth in a matter of seconds, businesses are increasingly exposed to political risks of all types — from riots and civil unrest to strikes, and not forgetting, terrorism attacks, which can all cause severe disruption.
The past year alone has seen civil unrest in several global hotspots in South America, Hong Kong and France. These events highlight how easily protests can occur and how long they can last, resulting in property damage, business interruption (BI) and a loss of income for many businesses.
Political violence hotspots
Some of the most violent unrest in recent history broke out in Chile, where prolonged protests flared up initially in response to a four-cent fare increase by the Santiago Metro subway. Many subway stations were destroyed by protesters, causing US$370 million in damages. The protests paralyzed the city’s economy, infrastructure and commerce. All told, the extended strikes, marches and protests could reportedly cause up to US$4 billion in property damage claims, with (re)insurers bearing the brunt of that.
The most striking example of commercial disruption, however, was to the retailer Walmart, whose Chilean subsidiaries suffered significant losses — more than 128 of its 400 supermarkets looted, with 34 set on fire and 17 destroyed, according to Reuters.
Protests also began in October 2019 and continued into November in Bolivia in response to alleged electoral fraud and caused an estimated US$167 million in losses, around US$16 million, of which, was attributed to shipping difficulties and production halts in Cochabamba, the country’s agricultural and industrial hub. The protests successfully ousted longtime President Evo Morales, who promptly fled to Mexico and encouraged a civil war be waged by his remaining supporters against the new regime.
In Colombia, anti-government protests attracted as many as 250,000 people during a national strike against corruption and austerity measures during November and December 2019, causing the death of at least three people in violent clashes. In Ecuador, 11 days of protest in early October 2019 in response to austerity measures, including the cancellation of fuel subsidies, left at least seven dead and more than 1,000 injured, resulting in roughly US$1.3 billion in economic losses to the country.
Meanwhile, ongoing protests over proposed extradition legislation and loss of autonomy in Hong Kong have so far resulted in over four thousand arrests, a 24% year-on-year plummet in retail sales in October 2019 and a 40% fall in tourist activity during the same period.
Today’s highly connected supply chain is dependent on available transportation infrastructure. If roads, bridges, ports or airports are closed or blocked by protesters, or need to be repaired, this will delay or even interrupt the production process, especially if the company operates with ‘just-in-time’ supplies.
In France, a tax increase on all fossil fuels, but particularly on diesel, resulted in extended “Yellow Vest” protests, rioting and looting, first by farmers in rural areas and then in city centers throughout the country. Government estimates suggest that total economic losses across France could surpass US$4.43 billion due to a drop in foot traffic since all protests have targeted Saturday afternoons, as well as shops being unable to reopen quickly enough after incidents.
How has insurance responded?
Globally, insurers are seeing an increase in political violence losses, in part because customers are buying more insurance but also because companies and supply chains are increasingly multinational, which makes them more exposed, given civil unrest events are increasing around the globe.
The fallout from the Chilean, Hong Kong and French protests, in particular, illustrate how insurance responded to the unrest.
In Chile, Walmart’s approximate US$500 million in losses from the riots is a significant contributing factor to what could become the largest political violence insurance event ever.
In Hong Kong, all-sized businesses suffered smashed windows, graffiti and even fire for their perceived support of mainland China by activists.
In France, protracted political unrest resulted in extensive property damage, BI and a general loss of income for many businesses, with an estimated US$2.1 million in insurance claims reported as of May 2019.
Traditional property insurance typically responds to physical losses from fire, flood, wind or other natural occurrences, and may have an element of BI attached.
It might also include an element of terrorism insurance, but property terrorism insurance does not cover all forms of political violence. That’s where political violence insurance “minds the gap.”
What is political violence insurance?
Political violence insurance provides coverage for terrorist acts, acts of sabotage, riots, strikes, civil commotion, malicious damage, insurrection, revolution, rebellion, coup d’état, war, civil war or counter-insurgency. Additionally, common extensions include denial of access (businesses shuttered because authorities have closed the area, whether damaged or not), loss of attraction (if closed, businesses cannot attract customers), and other civil disturbances.
The full political violence product has existed for some time but was never a widely bought cover. That changed dramatically during and after the ‘Arab Spring’ in 2010 and 2011, when companies — especially in the Middle East and Africa — realized that the full product provided a gapless cover along the entire escalation process, which could run the gamut from violent demonstrations to a rebellion and, in a worst-case scenario, to a full-fledged civil war.
Longer and more violent events
In recent years, as major terrorism losses have declined somewhat, Strikes, Riots and Civil Commotion Clause (SRCC) losses, in particular, have become more frequent. The events in Chile, Hong Kong, France and elsewhere were clearly civil protests rather than acts of terrorism. Yet, especially in Chile, the events were much more violent than anticipated, while the “Yellow Vest” and Hong Kong student protests were much longer in duration than expected.
Mitigation
Businesses should be aware of their surroundings and what is happening around them. Businesses at street level should realize their vulnerability and have contingency plans in case of violence. On the Champs-Élysées during the “Yellow Vest” protests, store-front windows of chic retailers were smashed and merchandise looted.
Tourism and business losses in city centers in France cost some businesses 20% to 30% of their turnover, while shopping centers suffered losses around US$2.2 billion and cafes, hotels and restaurants around US$933 million, according to government reports.
Businesses near such attacks will suffer lost revenues, whether or not they incur physical damage, during the time the area is cordoned off or until the infrastructure can be repaired to allow entry of customers, vendors and suppliers. An individual business doesn’t have to be a direct victim of a rioter or terrorist to suffer a loss.
Insurance extensions such as a denial of access (access/ingress/egress) policy covers losses sustained during the period of time when ingress to or access from the insured property is prevented. The trigger is physical damage, and insurers commonly apply a radius to the impact area to include in the coverage.
Policy extensions for things like denial of access are important coverages to consider and are increasingly requested by companies. Meanwhile, “loss of attraction” or “leader property” claim scenarios may occur where there has been no direct damage against a business’ premises or where there has been no physical damage at all. A BI impact resulting from a physical loss of attraction to a property in the vicinity of the insured’s premises or as a result of a non-damage/threat type event can be quantified.
If there is a closure of an important landmark, airport, transport hub or of a particular place where large numbers of people come together (for example, a shopping mall, theme park or nightclub), a reduced number of visitors will result. Industries particularly exposed are retail, hospitality and leisure. Some insurers use forensic accountants to determine whether a business has lost attraction following such an incident.
Market outlook
Currently, 47 jurisdictions have reported a significant uptick in civil protests, a trend that intensified at the end of 2019. These reports included activity in Chile, Hong Kong and France along with Nigeria, Sudan, Haiti and Lebanon, according to a recent study by risk consultant Verisk Maplecroft.
The study projects that 75 out of 125 countries in its database will experience an increase in political unrest through the first half of 2020. Its extreme risk countries include Ethiopia, India, Lebanon, Nigeria, Pakistan and Zimbabwe. Hong Kong and Chile were cited as the world’s riskiest countries.
Recent events illustrate that political violence and civil unrest are eclipsing terrorist events as a major political exposure. Such events are now at the top of the agenda of risk managers, brokers and insurers.
Bjoern Reusswig (BJOERN.REUSSWIG@ALLIANZ.COM) is chief underwriting officer of liability and head of global political violence and hostile environment solutions at Allianz Global Corporate & Specialty SE. This piece first published in an Allianz company magazine and is republished here with permission.
Related: