Political violence insurance – avoiding the boom then bust

With increasing violence, growing demand for a niche product

Political violence insurance is a growing market

The Middle East is the most terrorist-afflicted region in the world, according to leading global insurance and reinsurance firm Aon’s 2014 Terrorism and Political Violence Map, with 28 percent of all worldwide terrorist attacks. According to the same report, Lebanon is identified as one of 19 countries with a “severe risk” rating based on measures correlating to Aon products of (1) terrorism and sabotage; (2) strikes, riots, civil commotion and malicious damage; and (3) insurrection, revolution, rebellion, mutiny, coup d’etat, civil war and war.

Brokers that deal with political violence insurance in the region have pointed to an increase in demand since 2006 for this specialty product in the Lebanese market. As political tensions in the country escalate, and businesses increasingly feel their assets threatened, those with the means are looking to get part of their company’s value insured. Means are critical for this type of product, as premiums for political violence insurance in Lebanon can hit double digit percentages and have been increasing year-on-year. For businesses that want to minimize their exposure to risk in an increasingly volatile situation, they must pay a hefty price.

Growing demand for a niche product

Demand for political violence insurance in Lebanon often spikes just after an incident, as demand appears to be as volatile as the political situation. “The overall demand is increasing. But sometimes there is reduction, and sometimes there is a stark increase,” says Farid Chedid, chairman and CEO of reinsurance brokerage house Chedid Re. Political instability, demand and cost of political violence insurance all tend to increase together, often resulting in “people looking to buy insurance at the worst time,” according to Chedid.

In Lebanon, most of the big hotels, banks, factories, gas stations, department stores, and even some residences and pharmaceutical companies have a percentage of their value covered by political violence insurance. Part of the increase in demand for the insurance can be accounted for by the natural expansion of businesses already covered by political violence. As these businesses grow, they renew their yearly contracts to cover larger risk limits.

But businesses also perceive an increase in threats, and are expanding their political violence coverage proportionally. An increasing trend in Lebanon is for companies to get full political violence coverage, which includes strikes, riots and civil commotion, sabotage, terrorism, war on land and looting. Opting for full political violence coverage is linked to companies’ perception of threats, and is not the same everywhere in the region (for a full description of political violence products, see following page). “The main difference between Lebanon and other regional countries is that most businesses in Lebanon are getting a full [political violence] cover,” says George Bitar, founder and CEO of Premium Broking House, adding that political violence insurance for war on land, one of the more costly products, is not as common throughout the region. Most companies in Egypt and Bahrain, for instance, limit their coverage to strikes, riots and civil commotion insurance.

Brokers are also encouraging their clients to get full political violence coverage because of the complexity of the political situation in Lebanon, so as not to leave any room for gray areas. “For example, if in the war between Hezbollah and Israel in 2006 the loss that occurred was coming from Israel, the underwriter would say this is a war loss. If it’s coming from Hezbollah underwriters might say this is not a war, this is a terrorism loss,” explains Bitar.

Companies in Lebanon can select from a wide range of political violence coverage. Following is the most commonly used political violence coverage in Lebanon, based on Lloyd’s of London syndicate Hiscox’s definitions.
Act of terrorism: a violent or unlawful use of force committed by a group or an individual for political, religious, or ideological motives for the purpose of intimidation, coercion, or disruption of a state’s economy, or to overthrow, influence or affect the conduct of a government
Civil commotion: a substantial disruption of public peace committed by three or more people with a common intent
Civil war: armed conflict carried out by citizens of the same country against each other
Coup d’etat: a change in government brought about by non-democratic means such as the use of force
Insurrection: a violent citizen uprising against their government
Malicious damage: the intentional loss, damage, or destruction of property in the event of civil commotion
Mutiny: rebellion against a superior carried out by members of armed or peacekeeping forces
Rebellion: an organized armed resistance committed by citizens against the laws or activities of a government
Revolution: the overthrow of a government by its citizens
Riot: when three or more people with a common intent cause a violent disruption of public peace
Sabotage: a subversive act or series of acts for political, religious, or ideological purposes carried out to influence a government or the public
Strike: the stoppage of work by three or more people to make demands on their employer
War: declared or undeclared hostilities between two or more nations or states

Based on client demands, policy wordings have also evolved to become more inclusive. According to Christina Chalita, an executive director leading the non-marine department at insurance and reinsurance firm Nasco Karaoglan France, which specializes in emerging markets, new wordings are adopted roughly every six months. The most inclusive wording to date, she claims, comes from insurance syndicate Hiscox, part of insurance market giant Lloyd’s of London. The new wording replaced the previously dominant wording that had come out of Beazley, also a syndicate at Lloyd’s. The main changes to the wording were additional coverage for looting and denial of access, as well as removing the cancellation clause, which used to stipulate that either party could cancel the coverage within 30 days.

A heavily reinsured line of business

Lebanese companies take on a high rate of political violence reinsurance, hitting 99 to 100 percent according to brokers, which is taken on by international players and primarily by Lloyd’s of London syndicates. These reinsurers are reinsuring countries around the world, a diversification that enables them to sustain a loss. “Political violence can only be written as a global business,” says Chedid, adding that insurance companies in Lebanon who are only writing for one territory don’t have the income to compensate for a loss if Lebanon is hit.

Even among international players, the appetite for political violence insurance has its limits. According to the global insurance broker Lockton’s War and Terrorism report, the capacity available for political violence insurance in the worldwide marketplace in 2012 was estimated at $2.5 billion.

Though not all brokers agree on how much appetite is left in the international market to insure Lebanese companies against political violence, it is universally acknowledged that international underwriters are very cautious when they do underwrite risks in Lebanon. According to Bitar, companies are skeptical to commit past a certain amount because if there is a war in Lebanon, it could lead to a near total loss of their risk underwritten.

At times, international underwriters will altogether reject a policy if they associate it with too high of a risk. According to Chalita, most political violence reinsurers will decline covering embassies because of their heightened exposure to risk. International organizations with headquarters in Beriut also have trouble getting underwriters to cover their policies. Factors that underwriters generally take into consideration when they are deciding whether or not they are going to take on a policy includes location, whether it has had previous losses and whether the owner is related to any political party or subject to any assassination attempts.

Pricing premiums

When underwriters do decide to take on a policy, their perception of risk will determine the cost of the premium. Political violence insurance in the Middle East, where risks are high, is among the more expensive lines of insurance. It is no surprise that those who opt for it are large businesses, as the high price tags associated with political violence insurance means that not all businesses can afford this luxury; particularly in Lebanon, where political violence insurance premiums are considered the highest in the region, often outranking even Iraq.

While brokers did not come up with a specific number, they said that premiums could go up to the double digits. “It’s definitely not a conventional kind of an underwriting for any kind of policies,” said Bitar, who claimed that a minimum premium on risks ranging from a few hundred thousand to one million dollars start between $4,000 and $8,000 annually.

Risks insured can go much higher than $1 million, however. Nasco has clients whose covered risks range between $10 and $50 million, starting with banks at $10 and $20 million, a shopping mall at $25 million, a hotel at $35 million and a telecom company at $50 million, according to Chalita.

Location of the property has the most important bearing on the price of the premium, as certain areas of Lebanon are much more prone to political violence than others. The past year has seen an important fluctuation of premiums based on location. According to Chalita, premiums over the past year have increased from 25 to 50 percent in certain areas, while decreasing in others: Beirut’s downtown and southern suburbs have witnessed an increase of 50 percent, Saida, Sour and the Bekaa by 20-25 percent, while premiums in Jounieh decreased by 15 percent.

The cost of political violence insurance has led many companies to walk away after a quote. “Many companies think this type of insurance is very cheap, but it’s not. Often companies will only insure part of their worth,” says Chalita. Some companies have opted to have only part of their policy covering the more expensive full political violence, with the rest insuring for a limited range of products. For instance, a company with a $50 million risk limit could have $10 million insured for full political violence with the remaining $40 million insured  only for sabotage and terrorism.

The potential loss associated with a severe event forces underwriters to build for the future. “You have to accumulate reserves to [prepare] for a major loss,” says Chedid. Several major claims in 2005 and 2006 were both devastating for the country and for political violence insurers and reinsurers, according to Chedid. These two years saw a number of  claims from factories, bank branches, and hotels covered under political violence insurance.

Today, underwriters are becoming more careful and pricing policies higher as the political situation in Lebanon deteriorates. “There are some losses, and it’s becoming a little bit scary for underwriters,” says Bitar, pointing to the 2012 damage on a KFC in an attack in Tripoli, as well as last summer’s twin bombings in the city that also resulted in claims for material damage as examples.

It is clear to insurers that the lucrative potential of the industry, embodied in its high premiums, also comes at a very high risk.

Livia Murray

Livia covers business, finance and economic policy for Executive.

2 Comments

  1. Tarek said:

    If it’s coming from Hezbollah underwriters might say this is not a war, this is a terrorism loss,” explains Bitar.
    Hezbollah is not a terrorist group to say that it is a terrorism loss Mr Bitar.
    One day we will all be proud of our great resistance along with our great army.
    I hope you will create a free insurance for the poor people living in south of lebanon after loosing there houses from an israeli invasion.
    Can you do that?
    Im sure you can’t.
    Our assurance is already in the army and in Hezbollah,so your insurance is useless after such confidence.
    If you think of it deeply Mr Bitar,you are a financial terrorist because its in your interest to have a bad political situation for you to encourage people to come to you for political violence insurance.
    Good luck Mr Bitarrorist!

  2. Leyla said:

    This is really interesting and well-covered. Generally, profits are a huge determinant of insurance premiums and whether firms consider it worth getting a policy, so the rise of this kind of protection might pose problems for the petite bourgeoisie and domestic industry in general.

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