Continuing civil unrest in the Middle East and North Africa presents a challenge to the property insurance market — especially concerning the limits placed by the war risks exclusion.
ore than a year after the outbreak of protest in Tunisia, widespread civil unrest continues across the Middle East and North Africa. While the ongoing upheaval is most visible in Syria and Yemen, the outlook remains uncertain even in those countries where the effects of the Arab Spring has supposedly settled, including Egypt, Libya and Tunisia itself.
The continuing events present a challenge to the property insurance market. In particular, the Arab Spring highlights a topic previously regarded as something of a taboo in the industry – the limits placed on property insurance by the war risks exclusion.
Unlike the UK riots in August, much of the unrest across the MENA region, successful or otherwise, has taken the form of organised, armed attempts to overthrow national governments. Such unrest is classified as an insurrection or rebellion as opposed to riot or civil commotion, which implies widespread tumult and unrest, without the intent of toppling government.
The distinction is important in the context of property insurance; whereas it is usually the case that riot and civil commotion are included in general property policies, insurrection and rebellion represent war risks and are consequently invariably excluded.
War risks exclusion
Until the 1930s, war risks on land were written in the London market. However, the emergence of powerful forms of weaponry and tactics in the early part of the 20th century, coupled with the darkening political climate in Europe, caused the insurance industry to reconsider.
Lloyd’s underwriters and insurance companies were worried that new types of warfare, particularly aerial bombing, could lead to land assets being damaged on a scale too large for the market to cover.
The Spanish Civil War concentrated minds, and by the time the aerial attacks on Madrid and Guernica revealed the destructive potential of contemporary conflict, the War Risks Agreement of 1936 was in force between Lloyd’s, the British Insurers Association (now the ABI) and most international insurers.
The agreement banned all writing of land-based war risks and restricted coverage to moveable ships and aircraft. More than 70 years later, the reinsurance market in particular has ensured that the exclusion continues to appear in all property policies in much the same form.
The types of conflict excluded from coverage by the agreement extend beyond conventional war — a contest between the uniformed, armed forces of sovereign states — and property damage as a result of unconventional warfare is also excluded from coverage.
In the 21st century, unconventional conflict – involving informal combatants, such as militias, insurgents, and guerillas fighting against each other or regular military forces — is now the primary form of global warfare.
From asymmetric wars such as Iraq and Afghanistan, to the violence seen in Libya, Sudan and Syria, most conflicts are now unconventional, yet still subject to the exclusion. Depending on the detailed circumstances of the individual loss, it could be the case that property damage from the continued struggles across the MENA region is excluded from property insurance coverage under the exclusion.
Driven by demand
There is also the impact of the events of 11 September 2011. The attack on the World Trade Center resulted in the introduction of new terrorism exclusions in property coverage to protect insurers against potentially insurmountable losses if faced with similar catastrophes.
In fact, due to the breadth of the existing exclusion, this new exclusion did not significantly increase the range of political violence risks barred from traditional property coverage. Instead, it also excluded the kind of isolated, covert attacks witnessed in New York, Washington, Madrid and London that, in the 21st century, are seen — like other war risk perils — to present an unacceptable aggregation of risk.
Policyholders do not like to lose cover they have traditionally purchased so, driven by demand, a market for stand-alone terrorism coverage has developed rapidly over the past few years.
A combination of existing property coverages and stand-alone terrorism policies have restored the state of play that existed prior to 11 September 2011. This combination probably remains adequate for property in New York or London, Brussels or Paris.
However, it is inadequate in emerging markets. Both the traditional property policies and the stand-alone terrorism policies continue to exclude perils such as insurrection, rebellion, civil war, revolution, and “civil commotion assuming the proportions of, or amounting to, an uprising”.
Yet these are just the sort of risks that came into play in the Arab Spring, in the Ivory Coast and in many other of the world’s continuing conflicts.
In order to ensure comprehensive cover against risks witnessed during the Arab Spring and elsewhere, risk managers should buy back both the terrorism exclusion and the war risks exclusion. Property and investments in emerging markets need to be protected against the dangers of isolated terrorist attacks; against uprisings and insurrections; and against the rigours of conventional and unconventional warfare. In respect to the latter, recent events in Libya and Iraq have demonstrated the manner in which these forms of conflict can transition into each other.
In Iraq, a war between state forces evolved rapidly into a complicated, multi-faceted conflict between alternating alliances of regular and irregular forces. On the other hand, what started as an insurrection in Libya took on aspects of traditional state conflict as a result of foreign intervention.
It is also important to ensure coverage insures against the seizure of property in a conflict not just its physical destruction. Indeed, confiscation was traditionally seen as the main war risk by the insurance market. It’s the same for revolution. Both the Cuban revolution in 1959 and the Iranian revolution of 1979 led to a widespread expropriation of property, assets and investments. So, policies that cover wars and revolutions but exclude confiscation and similar losses are not the real deal — they are not war risks policies in the full London tradition.
The events of the Arab Spring demonstrate that both terrorism insurance and traditional property insurance are quite simply the wrong type of coverage for the kind of political violence currently taking place in the MENA region and elsewhere in emerging markets.
However, the logic behind the original war risks exclusion is still sound. Writing war risks in the general property market account remains unfeasible for insurers and reinsurers alike. For risk managers faced with the instabilities of the Arab Spring, the answer lies in the specialist political risk insurance market.
The PRI market has for some years written war risks on land for investments and loans. Today it is increasingly prepared to offer full war risks policies for loss of tangible property and consequent business interruption, in a form that dovetails with the war risks and terrorism exclusions of a property policy.
Written to country aggregates, war risks are aggregated with other products in the political risk portfolio. This enables insurers to diversify their risk portfolios, which are generally heavily weighted towards emerging market credit risk.
Finally, political risk insurers are best placed to develop the type of government reinsurance that naturally and historically has supported the private market writing of war risks. War risks on land is set to become a major class of business within the PRI market.
Charles Berry is chairman at BPL Global
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