With the recent slew of bombings further entangling Lebanon in the Syrian civil war, political violence insurance in the country is becoming increasingly sought after, as hotels, banks and malls are seeking to protect their assets. This is paired with international reinsurers becoming increasingly weary to underwrite risks in the present volatile situation, resulting in political violence insurance becoming less accessible and affordable, with premiums hitting the double digits (see story).
The smart solution lies in numbers: Lebanon should set up a risk pool that would make political violence insurance less vulnerable to loss and more affordable to its businesses. Such pools would spread the reinsurance risk among all actors, with a part of each premium entering the pool and building up a reserve. In the event of a loss, insurance companies can draw on the assets of the pool. This would allow insurance companies to set lower premiums and would keep money in the country — rather than the entire premium being exported to the pockets of international underwriters.
Risk pools for terrorism became popular in various countries in the wake of the 9/11 terrorist attacks against the US. A massive blow to the country, the attacks were also a blow to insurance companies because they happened at a time when terrorism insurance was still priced relatively low. This led many reinsurance companies to shy away from terrorism insurance, often putting exceptions for terrorism coverage in their contracts or charging exorbitant amounts for premiums.
The risk pools were set up in response to the withdrawal of terrorism coverage by insurance companies and to lower the then-market prices of premiums. They exist in various structures, with streams of income coming from premiums, government funding, tax dollars, property owners or a combination thereof.
In Australia, the government set up a risk pool — the Australian Reinsurance Pool Corporation — for terrorism insurance made up of premiums, commercial lines of credit and indemnities from the government. In France, the government created reinsurance pool GAREAT (Gestion de l’Assurance et de la Reassurance des Risques Attentats et Actes de Terrorisme), likewise for terrorism insurance. GAREAT pooled premiums together and the French state acted as the reinsurer of last resort.
Kenya also recently started a political violence and terrorism cover pool. Its Association of Kenya Insurers came together after several international reinsurance companies hiked their prices and withdrew their cover following sporadic violence and terror attacks. Each insurer is to contribute an equal sum to the risk pool.
A similar approach could solve the problems of Lebanese companies, currently burdened with high premiums if they choose to minimize their political violence exposure by getting insured. The Lebanese government and insurance companies can and should set up a risk pool — using international best practices — to respond to a shrinking supply of political violence coverage and increasing premiums.