Unrest Fuels Re-Evaluation of Political Risk Cover

Posted on Apr 20, 2011 by Sergio Ulloa (G+)  | Tags: Willis Group Holdings plc

As the climate of political discontent spreads across North Africa and the Middle East, insurers are reviewing their coverage capabilities against such situations. According to a new report issued by global insurance broker Willis Group, companies operating in volatile parts of the world may soon be unable to provide sufficient insurance coverage for their staff and assets. These firms may also find that their existing policies do not necessarily provide cover against the turmoil being felt in these regions. In Willis Group's report, entitled 'Political Risk Insurance: Mind The Gap,' the insurance broker warns of the risks of going global and that while "companies may be able to assess and manage technical and even commercial risks, it is extremely difficult to deal with or indeed predict political events." Traditionally, 'political risk' has been associated with governmental interference actions such as expropriation. However, Willis notes that national governments are now not the only source of political risk. Local governments, community groups, NGO's or other factions advancing political objectives can also be sources of political risk. Additionally, social issues such as poverty, human rights and labor disputes also fuel civil unrest and conflict. The report highlights that: "the situation in the Middle East and North Africa is a prime example of where the original touch point was not due to any direct intervention on the part of the government, but was ostensibly a populous movement driven by high food prices." Companies operating in emerging markets need to identify and monitor threats to business and to develop a comprehensive risk management strategy. This strategy should identify the necessary measures required to adequately mitigate these exposures, including the purchase of suitable insurance coverage with the capacity to respond effectively in the event of a loss. The Willis Group report details the three major types of insurance service that businesses concerned about political insecurity should consider: Strikes, Riots and Civil Commotions (SRCC) insurance, Terrorism coverage and full Political Violence cover. In the past, it has been a widespread practice for companies working in unstable territories to purchase SRCC or Terrorism cover as an extension on their property insurance and other policies. Willis warns however that these extensions would not necessarily protect against populous violence or other adverse current events. The report concludes that full political violence insurance is the most comprehensive coverage for the type of unrest North Africa and the Middle East is currently facing. Full political violence insurance is much broader than traditional terrorism policies, protecting against financial loss dealing with a wide array of civil problems including politically motivated sabotage, riots, armed insurrection and civil war. Premiums for full political violence cover are traditionally fixed at inception and will cover abandonment of property without physical damage. Coverage for the evacuation of staff from politically unstable situations is available under most corporate Kidnap and Ransom insurance (K&R) policies. The report cites incidences in Kuwait in 1991 and Lebanon in 2006, when it became necessary to evacuate staff. In these circumstances, many clients were simply not aware they had K&R coverage until it was brought to their attention. Emergency evacuation coverage can also be provided through group personal accident and business travel insurance policies, though the degree of coverage through these services varies considerably and has been typically focused on business travelers rather than expatriate staff members. Evacuation in times of strife can be an arduous process and Willis advises companies to plan and prepare in advance of an emergency. Companies concerned with supply chain vulnerability are advised to consider purchasing alternative options to political violence cover. Trade Disruption Insurance can cover an importer's financial losses resulting from confiscation, import embargo or port blockage, supplier insolvency, or war. In some cases, Marine Cargo insurance can also be used as an extension to protect against the risks of strikes, riots and other acts of civil strife. Insurance markets meanwhile are responding in a number of different ways. Willis warns that some insurance companies, particularly those more exposed to the now unstable territories, are actively reviewing their initial plans and current capacity to continue offering even the most basic SRCC policies to clients in these afflicted regions. Insurers have been communicating with their policyholders, making it abundantly clear that the turmoil currently enveloping North Africa is not addressed by SRCC extensions. Insurers may plan to re-evaluate the terms and prices of said policies or simply withdraw that precarious element of coverage all together. Specialist insurance markets, principally Lloyd's of London, are continuing to offer both terrorism and full political violence coverage. These dedicated insurers will be reviewing their own exposures and aggregations as well. The rating structure for insurance has become more stringent to reflect the overall perceived increase in risk. Global business continues to expand and explore new market opportunities. The Willis Group report acknowledges that with commodity prices projected to remain strong for the foreseeable future, there is significant potential for foreign investors to continue operating in emerging markets. Access to these resource-rich markets however comes with real and inherent risks to business. Tenuous political and socio-economic situations in these countries often combined with inadequate macroeconomic and civil infrastructure can impede development. Willis notes however that the widespread political demonstrations across Europe demonstrate that the tumultuous desire to overthrow incumbent governments is not unique to any specific part of the world. Commenting at the launch event for the report, Willis Group President, Grahame Millwater summarized the company's outlook: "Exposure to political unrest will only grow as global business continues to expand into new and often hostile territories where the threat of resource nationalism, creeping expropriation and supply chain vulnerability is increasing. Our message to companies around the world is to use their brokers to navigate the insurance options available for these risks and to identify any potential gaps in their coverage." Insurance Companies Mentioned Willis Group Willis Group Holdings plc is a leading global insurance broker. Through its subsidiaries, Willis develops and delivers professional insurance, reinsurance, risk management, financial and human resource consulting and actuarial services to corporations, public entities and institutions around the world. Willis has more than 400 offices in nearly 120 countries, with a global team of approximately 17,000 employees serving clients in virtually every part of the world.