The Counsel


Terrorism and Political Violence Insurance

By Saad Bhimjee

Executive, United Insurance Brokers (UIB), London

It was only in the last ten years that Terrorism & Political Violence insurance had become stand-alone coverage, but now with global unrest many businesses have started to include this insurance as part of their overall risk management.

This article aims to provide further insight into the origins of this segment in the insurance industry, how it functions and where it stands today.

Prior to the attack on the World Trade Centre on September 11, 2001 (9/11), the insurance market did not consider terrorism to be a threat which needed to be explicitly considered when pricing property insurance. Moreover, due to the lack of large scale global terrorism-related incidents prior to 9/11 or any apparent risk of large individual losses, terrorism coverage was offered as part of the general ‘All Risks’ property insurances for a nominal premium.

The events of 9/11 shook the insurance industry, with losses across property, liability, workers’ compensation and business interruption insurances, amounting to approximately USD 40 billion. These losses were the greatest in the history of the insurance industry, even surpassing previous losses from natural disasters. Furthermore, insurers were put into a difficult situation because reinsurance markets had already suffered immense loss in the previous decade, which limited their available capacity. Therefore, if another event with the scale of 9/11 was to occur again, it would be extremely detrimental to the insurance market.

As a result of this situation, a significant change to the property insurance market is that terrorism is now specifically defined and excluded from the standard property cover. Terrorism is now defined as:

‘An act, including the use of force or violence, of any person or group(s) of persons, whether acting alone or on behalf of or in connection with any organisation(s), committed for political, religious or ideological purposes including the intention to influence any government and/or put the public in fear for such purposes.’

To fill this gap, stand-alone terrorism market subsequently came into existence with the majority of insurance capacity provided by the syndicates at Lloyd’s of London. This market has matured over the past decade and delivers a broad array of coverage including Sabotage and Terrorism (S&T); Strikes, Riots, Civil Commotion and Malicious Damage (SRCC); and Political Violence.

S&T insurance is the most basic form of cover, which is triggered by the perils of Sabotage or Terrorism. This can be extended to include SRCC insurance which provides the client cover from the additional perils of Strikes, Riots, Civil Commotion and Malicious Damage. The most comprehensive coverage available is Political Violence which includes S&T, SRCC and other broader perils such as:

Physical loss or damage arising from Strikes (including lock-outs), Riots, Civil Commotion, Looting and Malicious Damage, Mutiny, Terrorism and/or Sabotage, Uprisings, Rebellions, Coup D’état, Insurrection and Revolution, War and Civil War.

The recent uprisings, which began in Tunisia and spread to large parts of the Arab world, have led to both political turmoil and large scale damage to property and lives. The initial reaction of the market to the crisis in Egypt was to hold back in order to assess current exposures and carefully monitor the situation. The volatility of the situation led to a great deal of uncertainty and as a result, the majority of underwriters were hesitant to commit to a twelve month insurance policy.

Some underwriters were willing to consider these risks due to the inherent high-risk, high-reward nature of the situation, but even for them the constant uncertainty of the situation led to ‘loadings’ on premiums which would prove to be unfeasible for the client. In fact, prices jumped quickly with an article in the ‘Insurance Times’ suggesting 25% rate increases in a matter of days. Another issue was the aggregation of losses i.e. one event affecting multiple risks insured by an underwriter. The nature of the situation was such that there was an influx of new risks from affected areas which quickly filled up underwriters’ aggregates and thus led to reluctance to underwrite any new risks.

From the client’s perspective, several had not budgeted for terrorism insurance and while many new risk enquiries came into the market, not all clients were prepared to pay the required premiums. The problem faced by the client was best described by an underwriter as: “this is like buying home insurance when your house is already on fire”. The situation was essentially reinforced by the market mechanisms of demand and supply, with demand rising and supply remaining relatively stagnant. As a result of this, prices rose.

The question that then arises is: what coverage should clients buy to protect themselves? This ultimately comes down to the definition of the unrest in each of the countries the clients are based in. While SRCC cover may be appropriate for countries where the riots do not develop into further perils, it is very difficult to ensure that the client will be protected and the final result will be dependent upon the views taken up by the underwriters and courts. Hence the most appropriate and comprehensive coverage is that of Political Violence. This is more so given that majority of the events include damages from ‘Uprisings’, ‘Rebellions’ and ‘War/Civil War’.

Despite the ongoing situation, Lloyd’s of London has continued to show resilience. While there was an immediate reduction in capacity, underwriters were quick to resume providing coverage. In fact, towards the end of the Egyptian unrest, underwriters were actively looking at risks again and continue to do so today. Risks from Algeria, Bahrain, Syria, Yemen and other countries have continued to be placed at Lloyd’s in the recent weeks and months. A noticeable change is that coverage requested has shifted to Political Violence.

Ultimately, the Terrorism and Political Violence insurance market is based on underwriting risks where the perception may often be worse than the actual situation. Underwriting tools, analyses, and modelling are constantly updated to incorporate the changing trends in the markets. Thus there will always remain an appetite for writing new risks which will ensure that premiums are competitive and appropriate for the various territories. As mentioned earlier, new risks in affected territories are still being underwritten every day.

To conclude, companies will need to place greater emphasis on Terrorism and Political Violence insurance as part of their risk management practices, to ensure that they are protected in the event that unrests of this nature occur in their region of operation.

Saad Bhimjee (ACII MSc) is an Account Executive at United Insurance Brokers (UIB) in London.