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UNDERWRITERS WATCHING PERU HOSTAGE CRISIS

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LIMA, Peru-Political risk underwriters show few signs of worry over the terrorist siege of the Japanese ambassador's residence in Lima, and little expectation that the kidnapping heralds a resurgence of terrorist activity in Peru.

But kidnap and ransom specialists are not so sure about the stability of the South American country, and Peruvian K&R premiums have been on the increase for more than a year.

Few losses are expected from the embassy compound siege that began in mid-December by left-wing guerrilla group Tupac Amaru.

Rob Davies, special risks underwriter for Hiscox Syndicates Ltd. in London, confirmed that the syndicate had had clients held within the embassy compound. They had all been released by the New Year, he said, and he expected the loss to be "negligible."

The insurance triggered by the situation is "malicious detention cover," paying out for the detained employees' salaries and legal and medical costs, plus any travel costs footed by the company to send replacement staff to resume work in the affected country.

None of the Japanese nationals held in the siege are covered by K&R insurance, because it is an illegal coverage in Japan.

Both Mr. Davies and Simon Gibbons, country risk underwriter for Trade Indemnity, agree that the Peruvian authorities are unlikely to storm the embassy, although local reports say that the Special Army Service is currently close to the situation in Lima. The SAS, a British paratrooper squad, was responsible for freeing hostages from the Iranian embassy in London in 1981.

"For the moment, the siege is not going to drastically change opinion on Peru," from the political risk underwriter's point of view, said Mr. Gibbons. Current information suggests there is no fundamental shift in the political and economic situation of the country, which has been improving since its debt situation was rescheduled in 1995.

As a result of the reschedule and strong political leadership from President Alberto Fujimori, the Export Credits Guarantee Department, the U.K.'s export credit agency, resumed writing Peruvian business in July 1995 after a 12-year hiatus. Upon resuming underwriting, Trade Minister Anthony Nelson said, "Peru has undergone a remarkable transformation, both economically and politically, under President Fujimori, and our project exporters can now look forward to a long and fruitful trading partnership."

A spokesman for the ECGD said that the agency had closely scrutinized the terrorism risk in Peru when it reviewed the country prior to resuming business. At the moment, "the ECGD will carry on as usual," said the spokesman.

But underwriters are looking to the Peruvian government to maintain its hard-line stance against terrorism, particularly because the terrorists attacked the Japanese Ambassador's residence. Japan is Peru's second-largest trading partner. "If Japanese companies think it is too dangerous, they could withdraw," warned Trade Indemnity's Mr. Gibbons. What's more, if the government backs down, it could spark a wave of similar terrorist activity across Latin America, he added.

Nevertheless, Mr. Gibbons views the siege as having a "short-term effect which will not affect profoundly the economic situation of the country."

Hiscox's Mr. Davies, however, saw the situation worsening as far as kidnap and ransom coverage is concerned. Rates have been on the increase for the past 14 to 15 months, he said, and he anticipated that kidnappings will rise in the short term.

Most, though, will not be politically motivated, he said, and the embassy compound siege on its own will not affect rates for kidnap and ransom coverage.