Analysis: World in turmoil boosts SRCC insurance market
Property insurers are retreating from the hard-to-quantify and growing strike, riot and civil commotion exposures, creating opportunities for specialty underwriters
Episodes of social unrest have mushroomed around the world in the past decade and look likely to remain on the rise for the foreseeable future, thanks to political polarisation and the aftermath of Covid-19.
As a result, insurance companies have taken steps to reduce their exposures to risks of riots, strikes and civil commotions (SRCC), a business line that has suffered in the past three years higher losses than ever before.
Specialist insurers with political violence expertise have an opportunity to step in and fill the capacity gap, as long as they are willing to take fast-growing risk exposures from multinational clients around the world.
“SRCC, including sabotage and terrorism, has grown into a significant specialist market and London is at the centre of it,” Julian Ball, managing director, North America at broker UIB, says.
This development is a result of what buyers and brokers have reported as a significant reduction in appetite from traditional property and casualty insurers for political violence risk.
Risk managers say since 2019 it has been hard to purchase SRCC cover in Latin America and France’s risk management association, the Association pour le Management des Risques et des Assurances de l’Entreprise, has highlighted SRCC as a particular source of concern in a political violence market where capacity has been subdued and pricing and conditions continue to harden.
“Insurers are getting more cautious when writing SRCC. They are looking more deeply into wordings, which is something they did not do for a long time,” Leo Ronken, senior consulting underwriter for Gen Re’s global property facultative business in Cologne, says.
Ronken says Gen Re has decided not to provide facultative support to political violence insurance as a standalone product. “It is an exposure we struggle to calculate; it is like looking into a crystal ball. It is too volatile and highly uncertain due to changing political environments. SRCC, however, is a peril we evaluate and offer solutions for,” he adds.
Rising losses
The caution is not without reason, as insured losses in the segment have been mounting recently.
According to PCS, before 2015 only one SRCC loss event – the 1992 riots that followed the beating of Rodney King by police officers in Los Angeles – breached the $1bn threshold.
Since 2019, however, that threshold has been breached by three events: the 2020 George Floyd protests, also in the US, caused more than $2bn worth of SRCC losses; while riots in Chile in 2019 and in South Africa last year touched $3bn, according to PCS.
“We have gone from never having seen that threshold [exceeded] before to seeing it three years in a row,” Tom Johansmeyer, head of PCS, says.
Not only have SRCC losses mounted in intensity, but their frequency is also on the rise. Other significant recent events have included riots in Colombia, last year, which caused insured losses of around $150m, and civil unrest episodes in Bolivia ($167m) and Hong Kong ($80m), both in 2019.
The long-running Gilets Jaunes protests in France cost insurers an estimated €200m ($226.8m). PCS even estimates the recent Kazakhstan protests caused between $50m and $100m in insured losses. “In any other era, those would have been significant individual SRCC losses for the insurance industry,” Johansmeyer points out.
According to the Carnegie Endowment for think tank International Peace, there have been 230 “significant” anti-government protests in 110 countries since 2017. The number of small-scale demonstrations is also on the rise.
A report by released by Chaucer in July said the number of demonstrations around the world rose 36% in the 10 years after the global financial crisis, compared with the previous decade. The situation has only become worse with social unrest linked to the Covid-19 pandemic.
Factors such as the growth of social media have been at the forefront of such developments. In the past, riots tended to be concentrated on a single location each time. Now there is no way to forecast whether they will spread as activists use Twitter, Facebook and Instagram to inflame their supporters.
The protests of Chile, in 2019, and Colombia, in 2021, illustrated how easy it is for simultaneous riots to catch fire in different cities at the same time. The George Floyd riots at one point were taking place simultaneously in more 20 US states. Before that, insurers would rarely consider the risk of facing SRCC losses in more than one state at a time.
Business trends affecting insurance buyers have also added to the exposure. As large retail and hospitality chains look for growth via the opening of new facilities or the acquisition of smaller rivals, they may find themselves the target of rioters in different locations during a single wave of protests. A tendency to concentrate stores and restaurants in crowded downtown areas is another factor boosting exposures.
Exclusions
Property insurers have reacted accordingly by adding exclusions for political violence in their standard policies, paying a degree of attention to the risk of riots and social unrest that was not present before.
“Insurers have become more cautious regarding capacity and how to price SRCC risks,” Ronken says. “In the past, it was considered a secondary peril in Europe, as we had a very stable situation, but that has changed. And they now want to collect adequate premium for it.”
But modelling the risk is the challenge the market needs to overcome if it is to provide cover to a universe of insurance buyers that is ever keener on protection against civil unrest.
“We appear to be in a prolonged peak peril period for SRCC,” Johansmeyer says. “Insurers and reinsurers don’t understand political violence well.”
A lack of historical data regarding losses prevents underwriters from properly pricing the risk. The need to take into account human agency – a challenge that natural catastrophes do not present – makes the whole process a bit harder for insurers’ modelling teams.
Political scientists have made some progress in identifying data that can be used to estimate the risk of social unrest. For instance, high infant mortality rates have been associated with the threat of civil wars, as the lack of healthcare infrastructure can often be indicative of broadening discontentment among the population.
There is also the concept of “anocracy”, developed by political scientist Barbara F Walter, as a promising development. As an intermediary state between democracy and autocracy, it indicates a country is ruled by an unstable democracy or a weak autocracy, both of which can give rise to corruption and other phenomena that work as fodder for popular rage.
Business interruption
Also, a large share of the losses covered by SRCC insurance are likely to be linked not to physical damage, but to business interruption, which is famously challenging to model even in the most established property lines. PCS has estimated around one-third of the $2bn insured losses posted during the 2019 riots in Chile were due to business interruption claims by large retailers.
A further challenge is the level of subjectivity that involves the interpretation of episodes of civil unrest. Governments have been known to try to shut down peaceful protesters by branding them as terrorists, which, in practical terms for policyholders, means their claims fall under terrorism exclusions, which are a staple of property policies. It often happens that insureds believe they are covered against looting thanks to their SRCC covers, but that is often not the case, unless clearly stated in the wording.
“Many of the definitions in SRCC covers are untested in courts. Was it a revolution or a riot? Situations can be very unclear,” Ronken says.
All these factors combined have made it tricky for insurance buyers to have SRCC covers in place, especially in places like Latin America.
“It can be challenging sometimes,” Ball says. “When customers see SRCC being taken out of standard property policies or look to options to find the better choice, price can be the determinant factor on whether they revert back to the property policy or buy the cover on a standalone basis.”
SRCC capacity has remained stable in recent times, Ball says, although there have been shortages right after episodes such as the Chilean and George Floyd riots. When that happens, however, it usually means capacity becomes tighter in the affected markets and not around the world, Ball adds.
There has also been a flow of new entrants into the marketplace, as not only niche players, but also multiline insurers see it as a profitable line of business. Ball says UIB has recently been able to replace the underwriters of a large programme, belonging to a big customer with significant exposures, with mostly new insurers.
Brokers sometimes see it as a better option for clients to write SRCC covers back into the property policy, rather than buying a standalone policy, and it is often possible to achieve that, Ball says.
“In most cases, there is flexibility by the market to continue to offer SRCC in existing policies,” he says.
“If the property market had the choice, it would probably remove SRCC in its entirety. At the same time, the reason property insurers provide for this is because it is included as part of their reinsurance treaty protection, so they have the ability to offer it, but it becomes a case of how they manage their portfolio of risks around the world, and some have chosen not to offer SRCC cover for certain territories and risk profiles.”
By Rodrigo Amaral – Insurance Day
