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Middle East unrest puts spotlight on insurance
As turbulence in the Arab world continues, Anthony Palmer, deputy chairman, BPL Global, highlights the deficiencies in investors' standard property insurance policiesUnrest and instability in the Middle East and North Africa is continuing to disrupt business and, as a result, corporates are beginning to appreciate the necessity for insurance cover. Indeed, political risk insurance (PRI) is specifically designed to cover risks related to political disruption in foreign countries – especially in the emerging markets.
PRI can be broken down into two categories. There are pure PRI risks, which are investment insurance (equity form and lenders’ form) and property-based PRI policies, and non-payment risks, which include specialty trade credit insurance and credit insurance for banks.
While risk managers are aware of the dangers to insured property posed by the current unrest, many believe they are adequately covered by a combination of their standard property policy and stand-alone terrorism insurance. Yet for property in emerging markets this is frequently not the case. Both general property policies and conventional terrorism coverage are rather limited in scope when it comes to political violence – perhaps surprisingly so.
Arguably, much of the political unrest in the Middle East and North Africa amounts to insurrection. Insurrection is a “war risk” in the context of property insurance, and war risks are always excluded from general property policies. It is important to appreciate that the “war risks” exclusion means much more than war and civil war, so the exclusion bites well before the violence escalates to the level currently seen in Libya. This means that investors who rely on their property policies in the context of the current unrest may find they are not insured.
The same goes for conventional stand-alone terrorism cover. War risks like insurrection, rebellion and revolution are, once again, excluded, as are lesser forms of civil unrest, meaning that investors may be let down by both policies. And, by the time they realise that this is the case, it is often too late.It will, certainly, be interesting to see the impact that the current unrest in the MENA region will have on the insurance market.
We believe it will accelerate the growing realisation that where risk managers are responsible for insuring property in emerging markets, part of their insurance budget needs to be spent on a land-based “war risks” policy – coverage that only the PRI market can provide.
The PRI market is in good health. Overall market capacity has held up well this year, despite numerous challenges. The PRI market coped well with the surge in claims arising out of the global financial crisis, and is continuing to expand. The outlook for the PRI market is positive.
Recent events in MENA emphasise that there is a continual need for specialist political risk insurance cover. Both corporates and financial institutions need to scrutinise the terms of their existing property insurance policies to ensure that their cover remains relevant and inclusive in today’s climate of volatility. Unfortunately, many – particularly those relying on standard policies – may not be as comprehensively insured as they had hoped.