Risk transfer for revolutionary times

War, terrorism and political violence: it’s hard to imagine a more unpredictable risk to manage, especially in light of recent events around the world. Egypt, Tunisia and Thailand were all regarded as relatively stable and trouble free until recently. Yet sustained and destructive rioting broke out in the streets with little warning in all three countries.

Russia has a history of problems with separatists but the recent bomb outrage at Moscow’s Domodedovo airport, while less surprising, was still shocking.

Behind the headlines and the human suffering, such flashpoints can have serious implications for businesses, as David Guest, war, terrorism and political violence (WTPV) underwriter at Hiscox points out. “Businesses today increasingly have multinational activities, sometimes taking them into more complex parts of the world,” he says. “Businesses today are more integrated across countries and continents: manufacturing in one part of the world is integral to sales in another.”

An indirect exposure can be as costly as a direct hit, according to Kerri O’Dwyer, terrorism underwriter at Beazley Group: “In the sense that even if an event does not affect a company’s exposed assets per se, if the event affects any part of the inward/outward logistics chain on which the company relies (eg closure/disruption of road, rail, sea and airports) and/or affects the supply of crucial raw materials, then the company will be impacted to some degree,” she told lloyds.com. “Indirect impacts also arise where companies find that their staff are simply in the wrong place at the wrong time.”

Take cover
The problem for businesses, especially those operating in emerging countries, is that they are vulnerable to such a wide range of political risks - from strikes and malicious damage at one end of the spectrum to coup and civil war at the other. For those companies that want to transfer at least some of the risks they run, it can be hard to differentiate between the possibility of say a terrorist act or a coup d’etat in any given country.

That’s why many companies increasingly opt for a broad WTPV cover, as opposed to more narrow terrorism insurance, for example. “Our WTPV product is really a response to conventional property policies that exclude certain perils. What clients want is consistency; they don’t want to have cracks in the policy for risks to fall down,” Guest explains. “Sometimes in unstable markets it is difficult to differentiate between perils on a daily or even hourly basis.”

Coverage is widely available in the market for physical damage and resulting business interruption for a range of listed perils, O’Dwyer says: “There is more limited capacity for liability coverages in the market – but cover is available for third party and employers’ liabilities. Generally, liability coverage is for terrorism perils only – but there are markets who will consider broader coverage.”

More buyers
Surprisingly perhaps, there are very few countries for which insurance is not available from Lloyd’s. Hiscox writes 2,000 risks a year in 150 countries. “We’re legally unable to write insurance in some countries but there’s only a handful we won’t consider,” Guest confirms. “In 2002, 50% of our [WTPV] business was North American. Today it is more like 25%. We write business everywhere from Afghanistan and Iraq through to Finland and the Bahamas.”

All sorts of companies now buy cover, including pan-utility businesses and retailers as well as large industrial petro-chemical companies and the construction sector. Bank lenders are increasingly risk averse and often insist that borrowers on large projects buy the cover. Real estate owners and investment funds as well as hotel chains are also buyers.

Pricing varies depending on the client, country risk and perils purchased, O’Dwyer says. “Yes, it can be expensive but the client needs to weigh this up against the potential fall out from being involved in a political violent event. Capacity is available and underwriters are willing to listen to clients’ concerns and needs to make sure that cover is tailored to suit their requirements,” she adds.

Risk aware
“Overall, a big reason for more companies purchasing WTPV insurance is that the risks around political violence have moved higher up the corporate governance agenda,” David Guest says. “So clients are becoming more risk aware. They are assessing the perils they face more closely in the locations they operate and they’re taking the decision to transfer some of that risk.”

The wider reputational risks that can affect companies caught up in civil unrest are harder to transfer, however, especially where a business appears complicit with an oppressive regime. “The local mob may specifically target the business and its expat staff as proxies for targeting the relevant minister or ministry,” says Beazley’s Kerri O’Dwyer. “In an age of G7/G20 riots and instant news, the destruction of a business widely suspected, rightly or wrongly, of being in the government’s pocket will play out in the international media in only one way.”

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