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Plotting a Course Through Geopolitical Instability

war in ukraine. Destroyed Ukrainian building and damaged flag in the wind.

Insurers are scrutinizing their books to see how the far-reaching implications of Russia's invasion of Ukraine and an uptick in civil and political unrest around the world may impact their business.

Losses from major disturbances in Chile, South Africa and the USA — especially in the wake of the killing of George Floyd by a police officer in 2020 and the storming of the Capitol Building in Washington by disaffected Trump supporters in January 2021 — have shaken previous assumptions.

The causes of social unrest are many: crude populism and the rejection of the political establishment, polarisation and deep societal divisions, climate change, the Covid pandemic, increasing authoritarianism and the displacement of millions of people through war. This makes identifying the triggers and potential hot spots very difficult, says Tarique Nageer, managing director, specialised risks — terrorism and political violence for Marsh in the US:

“The pandemic was a catalyst for some recent instances of unrest, with large-scale demonstrations and rioting in Amsterdam, Calgary, and London in 2001 prompted by discontent over government restrictions intended to curb the spread of the coronavirus.

These events are very heavily reinsured so it impacts the whole value chain of insurance.
Sridhar Manyem, director of research, AM Best
Sridhar Manyem.jpg

But political violence can be attributed to broader — and often systemic — socioeconomic causes. The driving force behind the 2021 protests in Johannesburg, Pretoria, and other South African cities was the jailing of former president Jacob Zuma. And 2021 demonstrations in Northern Ireland were initially sparked by tensions over the effects of Brexit while the death of George Floyd led to unrest across many American cities.”

The riots sparked by the Black Lives Matter (BLM) protests over George Floyd’s death hit the insurance industry hard with losses so far exceeding US$2bn, the first time a civil disorder event has topped US$1bn and enough for many insurers to categorise it as a catastrophe event.

With war in Ukraine now looking likely to be protracted, insurers are now anxiously counting the cost, although are a long way from hitting the panic button, says Catherine Thomas, senior director of analytics in for ratings agency AM Best:

“When we compare it with 2021 cat losses and Covid losses it is probably smaller but more concentrated. It is falling into the books of specialist insurers and reinsurers”, especially London Market carriers, reinsurers, contingency and aviation underwriters she says.

“There is still considerable uncertainty over the losses as we don’t know how long it will continue or how widespread the losses will be…but this isn’t going to be a liquidity event for the industry.

“Insurers have a good understanding of what their potential losses in the Ukraine might be. We have seen in the first quarter results that companies have put up their reserves.”

This will have an impact across the industry, says her colleague, Sridhar Manyem, director of research: “These events are very heavily reinsured so it impacts the whole value chain of insurance. Some reinsurers have already reported some significant losses so it will influence their pricing”.

The Ripple Effects of War

It is the wider consequences of the war that are starting to worry political leaders, central bankers and insurers, according to a recent report from McKinsey & Co, War in Ukraine: Twelve disruptions changing the world:

Social unrest will become more frequent in the second half of this year and into 2023, especially as the knock-on effects of the lack of harvests from Russia and Ukraine are felt. The potential for a crisis in the food chain is very high and it will be sustained.
Oksana Antonenko, a director in the Global Political Risk team at Control Risks
Oksana Antonenko.jpg

“The war in Ukraine has disrupted the global food production system. The two countries produce roughly a third of the world’s ammonia and potassium exports, essential ingredients in fertilizer. And they are the breadbasket for much of the world, supplying about 30% of global exports of wheat and barley, 65% of sunflower seed oil, and 15% of corn.

“Many countries rely heavily on wheat for their national diet, including imports from Russia and Ukraine. These countries are concentrated in Central and Western Asia as well as in the Middle East and North Africa. Syria and Yemen, already struggling with longstanding refugee crises and problems with food security, will likely be affected: both are highly dependent on wheat and thus exposed to higher prices and potential shortages.”

This will spill over onto the streets in some countries, says Oksana Antonenko, a director in the Global Political Risk team at Control Risks.

“Social unrest will become more frequent in the second half of this year and into 2023, especially as the knock-on effects of the lack of harvests from Russia and Ukraine are felt. The potential for a crisis in the food chain is very high and it will be sustained.

“Commodity price pressures coming on the back of over-stretched public finances in the wake of the Covid pandemic mean that even developed economies will suffer, especially with higher inflation.”

Searching for Clarity

Insurers are already reviewing the extent of the cover they offer, in order to provide greater clarity on what is insured and manage their potential exposure to claims. This can be a complex area with definitions sometimes highly contentious, especially when it comes to the boundary between political violence and terrorism.

There is still considerable uncertainty over the losses as we don’t know how long it will continue or how widespread the losses will be…but this isn’t going to be a liquidity event for the industry
Catherine Thomas, senior director of analytics in for ratings agency AM Best
Catherine Thomas.jpg

In general, political violence insurance provides coverage related to war, civil war, rebellion, insurrection, coup d’état, and other civil disturbances, while property terrorism insurance covers physical damage and business interruption resulting from acts that are motivated by politics, religion, or ideology. Both types of policy can also extend to insure losses from strikes, riots, and civil commotion (SRCC), although this is by no means universal.

Another problematical area that the BLM protests landed insurers with is whether the losses were to be taken together as a single occurrence or treated as separate, multiple occurrences. This can have a significant impact on the amount policyholders are paid out as they may be subject to multiple deductibles and policy sublimits. The single v multiple occurrence argument dragged on through the courts for years after the 9/11 terrorist attacks.

Insurers acknowledge these are tricky areas, according to a recent report from US insurer Chubb, Confidence in Conflict: Insuring Your Business Against Civil Unrest:

“Driven by increased frequency and losses, property insurers are increasingly looking to limit SRCC cover particularly for those assets more prone to damage or located in central business or major metropolitan areas where large scale damage can occur.”

It says the BLM protests raised some key issues for insurers: “Traditional property insurance policies were tested as questions arose about proximate causes and the underlying motives of the individuals involved in the protests.

“As the disturbances happened over many months and across 20 states, they stretched the boundaries of property insurance and brought into focus the need for precise language that defines which risks are covered by a policy and which are excluded.”

As well as scrutinising the policy details of the cover they are offering, insurers are also looking at their exposures to a wide range of geopolitical hazards and the risks of getting caught out by social unrest ignited by growing internal tensions and economic pressures.

Measuring, predicting and protecting against the consequences of the geopolitical storms swirling around the world is now a priority, says Antonenko.

“Many firms do now have teams embedded at a senior level and are now looking at these risks in a more rigorous fashion”.

It is a change that is likely to be a permanent feature as three decades of steady progress towards globalisation are replaced by a new era of unpredictable international tension and conflict.

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