Lloyd’s: Increasing Civil Unrest Driving Political Violence Coverage Demand

December 31, 2012

A report from Lloyd’s of London concludes that the increasing demand for political risk insurance “has been rising as civil unrest and political violence continue to threaten businesses around the world.”

The article on the Lloyd’s website cites several factors for the increase, including, “discontent over corruption and a lack of economic opportunities, as well as rising fuel and food prices, and a scarcity of natural resources,” according to Elizabeth Stephens, head of credit and political risk analysis at insurance broker Jardine Lloyd Thomson.

“Civil unrest will continue to be a significant risk in 2013, both in Europe and emerging countries, reflecting social change, austerity and the rising prices of food and fuel,” she added.

Stephens also noted that the impact of climate change and disputes over limited resources, like water and energy, are also causing unrest, and will increasingly affect companies’ business models and operations overseas.

She cites water usage as an example. Although “water use in the UK remains modest, imported consumer goods like cotton and food use large amounts of water that are becoming scarce and expensive in some countries. This will affect companies’ decisions on where to locate in the future.”

Roddy Barnett, political risks underwriter at Beazley, explained that civil unrest is a continuing threat, both to businesses operating in developing markets and increasingly those in developed countries, where the effects of austerity have hit populations hard.

Civil unrest is also being driven by factional, ethnic or religious divisions. Although by no means isolated to one continent, Africa is especially blighted by such issues – from the Boko Haram in Nigeria to the M23 in the Democratic Republic of Congo, Barnett added.

“Secession will be a growing theme over the next five years,” he continued, “not only in regions such as Mali or Northern Iraq, but also within dissatisfied Western nations, Cataluña and Scotland, for example.”

As civil unrest has increased in recent years, there has been a significant increase in demand for insurance against damage to property and business interruption from social perils such as riots, strikes, insurrections, and coup d’état, noted Steve Bessant, political violence broker at RK Harrison.

He explained that “political violence insurance is typically purchased by large property developers, heavy industries, utilities, banks, retail and hotel groups, although an increasing number of smaller companies are buying the cover as awareness grows. Cover is bought by both multi-national and national companies, including those in emerging markets. In particular there has been increased demand from Asian companies – for example Chinese companies operating in Africa which are purchasing political violence cover at Lloyd’s.”

Increasing investment in Iraqi infrastructure has also generated increased demand for political violence cover in the country. “A positive trend we have seen is that increasing demand for cover in Iraq is being met by available cover, which was difficult to come by a few years ago,” Bessant observed.

In political hot spots like Lebanon and Jordan, demand for cover has even exceeded supply. “Rates for political violence are stable, but they have been increasing in countries where demand exceeds supply and where insurers are looking to manage their aggregate exposure,” Bessant added.

The outlook for 2013 isn’t terribly promising. Stephens cited the civil war in Syria, presidential elections in Iran, and rising tensions with Israel as situations that are currently causing problems in neighboring countries like Turkey and Jordan. Protests are also likely to continue in Arab Spring countries like Egypt and Bahrain – where the underlying problems have not gone away and reforms could a generation to materialize, she added.

Lloyd’s also warned that “Africa, Asia and Latin America, despite generating much of the world’s current economic growth, could also experience greater civil unrest. Elections in Kenya and Indonesia in 2013 are already leading to increased levels of unrest and the threat of nationalism, while there are concerns over a debt default in Argentina and the threat of an overheating economy in Brazil.”

The installation of a new leadership team in China also creates uncertainty. Stephens explained that those leaders might become divided as they face a slowing economy. As a result there could be increased levels of civil unrest in the country. China is also becoming more assertive as its economic power grows, as demonstrated by its territorial dispute with Japan over the Senkaku islands, which caused violent anti-Japanese protests and an ongoing boycott of Japanese goods in China.

The risk environment from a political risk point of view has increased in complexity, particularly in the last five years, Barnett explained. “The interrelated nature of the global economy puts emphasis on macroeconomic changes and the flow of trade. This has elevated the importance of China in risk assessments; what China does will directly impact upon the economic stability of many high risk nations, especially in Africa where many nations are dependent on either Chinese financing or on Chinese investment.”

Source: Lloyd’s of London

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