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The so-called Arab Spring has raised a taboo subject in the property insurance market—war risks on land.
Because many of the uprisings across the Middle East and North Africa region are organized, armed revolts that aim to overthrow governments, they constitute “insurrections” or “rebellions.” It is this aim of overthrowing a government, rather than simply the scale of unrest, that sets apart events in the MENA region from lesser forms of civil unrest such as the recent riots in the U.K.
The distinction is important in the context of property insurance: Riot is normally covered, but insurrection and rebellion are “war risks,” and are invariably excluded perils.
The war risks exclusion appears in much the same form in all property policies and excludes much more than conventional war between the uniformed armed forces of sovereign states. By excluding insurrection, rebellion, revolution and civil war, it also excludes unconventional conflicts involving insurgents, guerillas and informal combatants. So property damage arising from the struggles in Libya, Syria and elsewhere in the region could well be excluded war risks, depending on the detailed circumstances of the individual loss.
Most modern conflicts from Afghanistan and Iraq to the Ivory Coast and Libya are unconventional. Academics refer to such conflicts as “pre-Westphalian,” a reference to the Treaty of Westphalia of 1648, seen as a dividing line that ushered in a period when war more often was between official, uniformed armies. As the insurance market has been addressing war risks for centuries, it is no surprise that the war risks exclusion is broad enough to exclude conventional war and unconventional conflicts like the Arab uprisings.
As a result, the new terrorism exclusion introduced after 9/11 did not greatly expand the range of excluded political violence perils. Insurgents and rebels may be labeled “terrorists” by their governments, but with insurrection and rebellion already excluded war risks, the terrorism exclusion was aimed mainly at the type of covert, isolated attack seen on 9/11 and in the London and Madrid bombings.
The Arab Spring has shown that the stand-alone terrorism coverage developed since 9/11 is equally aimed at covert terrorism, not civil unrest. In the context of the Arab Spring, the relevant perils are “civil commotion,” “civil commotion assuming the proportions of or amounting to an uprising,” “insurrection,” “rebellion,” “revolution” and “civil war.” But these are all specifically excluded perils under the market's standard terrorism policy. With terrorism insurance being designed to cover covert acts of terrorism, no one should be surprised if it proves to be of little or no value when political violence breaks out openly onto the streets.
Faced with the type of open political violence that has recently been seen in many areas of the world, risk managers need coverage that buys back not only the terrorism exclusion but also the war risks exclusion in their property policies.
Property in emerging markets needs cover for war risks, uprisings, insurrection and rebellion, revolution, civil wars resulting from insurrection, and for war itself, because, as Libya demonstrates, an insurrection may attract intervention from outside forces. There should, of course, be coverage for terrorism too, where property insurers now treat it as an excluded war risk.
Additionally, risk managers need to consider cover for confiscation, for centuries regarded by the insurance market as the main war risk. Revolutions, like conventional war, can lead to widespread expropriation, as seen in the Cuban Revolution in 1959 and the Iranian Revolution of 1979. A political violence policy that covers property damage but excludes the “taking” of property (confiscation, capture, seizure) is a “limited” political violence policy.
Who will provide the necessary war risks cover?
In the early part of the 20th century, war risks on land were written in the London market. This profitable line of business was ended by an insurance market agreement in 1936 that banned all writing of land-based war risks, and restricted war risks insurance to moveable ships and aircraft. At the time, industry leaders looked at the storm clouds gathering over Europe, and at the destructive power of modern weaponry, particularly aerial bombing, and concluded wisely that the aggregations that would arise from writing war risks for land-based assets could not be addressed in the general property account.
Today the thinking behind the 1936 agreement remains unchanged. No serious insurance industry figure thinks war risks should be written in the general property account.
There are several reasons that war risks on land should only be written within the political risk insurance market:
• The market already writes war risks on land. Though it often covers investments and loans rather than tangible property, the market increasingly is offering war risks policies for loss of physical property and consequent business interruption, in a form that dovetails with the war risks and terrorism exclusions of a property policy;
• Political risk insurers write to country aggregates and have the discipline to decline well-rated risks rather than to exceed those aggregates;
• War risks aggregate with the other products in the political risk portfolio;
• By increasing writings of war risks on land, insurers diversify their risk portfolios within their country aggregates, which generally are heavily weighted toward emerging market credit risk.
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.
Insurrection, most recently manifested in the MENA region, is as old as history itself. Political violence is history in the making. As history is made in the coming years, companies with property in emerging markets need cover against the sort of losses that history always leaves in its wake: in other words, they need cover for war risks.
The only place to find the right cover for what history has in store is the political risk insurance market.
Charles Berry is chairman of BPL Global, a unit of London broker Berry Palmer & Lyle Ltd., specializing in emerging market risks. He can be reached at 44(0)20-7375-9600.