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In Case of Uprising…

With the increase in political and civil unrest globally, clients need protection--no matter where they operate

In its July 16 – 22, 2013 “Health and Safety Alerts” newsletter, World Travel Protection Canada warned of protests and civil unrest in Brazil, Colombia, Bulgaria, Russia, France, Bahrain, India, Egypt and other countries. In that one week, cities around the world were affected by protests turned violent, rallies demanding a leader’s ouster, national strikes, and even car bombings.

These perilous events happen on an almost daily basis around the world—and, as recent demonstrations in Brazil and Turkey highlight, they can happen anywhere. It seems a foregone conclusion that the world will see more, not less, political violence in the future and businesses need to prepare for this. Political and civil unrest can have serious repercussions on an organization; properties can be damaged, business can be interrupted and operations can be forced to close.

With the political violence in Egypt dominating the headlines of late, companies are becoming more aware of the risks civil unrest presents to their business and are increasingly interested in transferring this risk through insurance.

Political Violence

Few insurers and brokers have reported any substantial claims or losses coming out of recent events in Brazil, Turkey or Egypt. However, following the unrest in the Middle East that began in 2011 and the most recent demonstrations and coup in Egypt, many have seen an increased interest in political risk insurance coverage. “Clients are now confirming that many of their policies or their traditional insurance coverages would not cover them for strikes, riots, [or] civil commotion. [They’re] looking for ways to cover that and political risk insurance is one way to [do that],” says Daniel Galvao, national practice leader, financial products, at Marsh.

For clients considering opening operations in countries with a history of civil unrest, political risk insurance is absolutely vital. It typically offers policyholders protection in the event of expropriation or nationalization, currency inconvertibility and losses resulting from damage or destruction of assets or business interruption caused by political violence.

Of course, like any insurance policy, there are exclusions clients need to be aware of. First of all, clients cannot purchase political risk coverage against their own government. Political risk coverage applies only to foreign, not domestic, investors. “The only way a Canadian company can protect for what happened in BC, for example, after [the Vancouver Canucks] lost the Cup, or what happened in Montreal when there were student riots, is through a stand-alone political violence policy,” explains Galvao. Like political risk coverage, political violence coverage covers losses resulting from damage or destruction of assets or business interruption caused by political violence, but is available to domestic investors.

Another major political risk exclusion is war between the five powers. “A war between the US, China, Russia, France or the UK is not covered, just because these five powers have been belligerent enough in the past that underwriters feel that it’s too risky to underwrite them,” says Galvao. “There is a whole industry push to try to remove that exclusion but we’re not there yet.” If a client commits an act that is proved to be corrupt, any claims resulting from that act would also be excluded. Lastly, if a client abandons his or her facility without consent from the insurer, any claims following the abandonment would not be covered. However, Galvao adds that there is coverage for forced abandonment, when a government instructs a company to leave because the situation is too dangerous.

Though political risk insurance covers business interruption caused by civil unrest, traditionally, that interruption must be caused by physical damage. There are situations, however, where business interruption is not caused by physical destruction. “It could be that the access to your facility is prevented because police are closing a whole area, such as seen in Brazil for example,” says Volker Muench, head of strategy and development property underwriting at Allianz Global Corporate & Specialty. Muench says that Allianz offers non-damage business interruption insurance, which provides coverage in these scenarios. “Non-damage [contingent business interruption] does away with this quite fundamental trait of property insurance and it describes certain triggers that, despite not being material damage triggers, still offer coverage for your [business interruption] losses or [contingent business interruption] losses,” adds Andreas Shell, global head of shorttail claims at Allianz.

Roadblocks to Business

In today’s increasingly interconnected world, a Canadian company could be seriously impacted by a riot in Uzbekistan. When companies rely on supplies from all over the world, supply chain insurance becomes of critical importance. “Civil and political unrest as a one-off event is not generally a concern from a supply chain insurance or risk standpoint,” says Leszek Bialy, vice-president of global corporate at Zurich Canada. “However, a history or increase of frequency of civil/political unrest can point to underlying political [or] economic issues that could give rise to other repercussions.” Political and civil unrest can lead to mass strikes, port closures and other barriers that can jeopardize an organization’s ability to secure supplies, and therefore trigger a business interruption loss, he says. Supply chain insurance provides coverage for the non-delivery or delay of supplies that have a financial impact on a company’s operations. (For more on supply chain risk read “Far East Under Water” in the March 2012 edition of Canadian Insurance Top Broker.)

Similarly, when political events affect the ability of a company to make a payment, Canadian companies can be left in the lurch. Galvao gives the example of the Corralito crisis in Argentina in 2001, when the government froze all bank accounts. “You had very good clients in Argentina ready to make the payments on their letter of credit, on their open accounts, they just couldn’t go get the money from the bank. It was completely out of their control,” he says. Trade credit insurance protects companies from events such as this. It provides coverage for suppliers in the event that their buyers are unable to fulfill their invoice payment obligations. (For more on trade credit insurance read “Extending Credit” in the September 2012 edition of Canadian Insurance Top Broker.) 

Identify, Reduce, Transfer

Though proper insurance coverage is one important aspect of managing the risks that civil and political unrest present, companies need to take other preventative measures to protect their business operations. “I would not start with insurance. What insurance does is it provides financial aid to the insured to basically repair or to rebuild their production and also to ease the financial [loss] in case of a business interruption,” says Muench. If a political situation forces a business to close for weeks or months, that could spell the end for that company, regardless of its insurance coverage. “Therefore, it really starts with the risk assessment or risk management of the client to see in which area does [the company operate]? From which area does [the company] get supplies? And to monitor those changes, especially when it comes to a political situation.” To stress the importance of proper risk management, Shell puts it like this: “When you buy life insurance, that won’t prevent you from dying. So it is still up to you to make sure that your life lasts very long with risk management.” He adds that, “[Insurance is] not a solution, it’s a tool to deal with a situation—but only one tool to deal with a situation.” Brokers need to help their clients identify their risks, says Muench, then reduce those risks with risk management and contingency plans, and finally, transfer the remaining risks through insurance.

Helping a client identify its risks is an important part of the job for the broker. Just because a country has a history of large civil and political demonstrations, does not mean that country would present the same level of exposure to every client. Galvao says that the first thing his firm tries to do is help clients understand the difference between country risk and project risk, or the risks a specific country pose to a company versus the risks that specific project or company has in any given country. “Many times the country might have experienced issues in the past, like civil unrest or revolutions, but where the company’s project is, or the industry that they’re in can determine whether they are less or more prone to that kind of trouble.” An extractive company, for example, may have a greater exposure to political risk in a certain country than a retail company, he says.

Regardless of the project, Galvao does recommend that clients get in the habit of looking at a country’s risk on a monthly or quarterly basis so they can better understand the pressures facing that country. “Normally people tend to rely too much just on what they read after the fact as opposed to doing a little bit of homework before,” he says. “We advocate clients do their homework, get to know the country a little bit better, because typically that gives you some hints that you could use to decide if you’re going to invest further or not.”

Uncertain Future

Like terrorism, many people initially believed that civil and political unrest was only a risk in certain regions of the world. As 9/11 and the Boston bombings clearly demonstrated, terrorism is not an isolated peril, and neither is political risk. Events like the student protests in Montreal and the demonstrations in Brazil can and do happen all over the world—and can effect your clients’ businesses in unforeseen ways. Instead of guessing which countries will present political risks to an organization, Galvao suggests companies take a multi-country approach. “What we’re seeing in the US, in Europe, and what we will likely continue seeing in Europe and even Asia, is this drive toward public governance and democratic changes. It doesn’t really differentiate between emerging markets and non-emerging markets. It’s everywhere,” says Galvao. “Instead of guesstimating if Argentina is the next [country] that is going to face a situation like this or not, you should insure your operations in all the emerging markets and some developed markets that you operate.”

Galvao believes that, going forward, political and civil unrest will become more prevalent. “I’d say in the next 20 years we’re going to see a transition of non-democratic governments to more or to fully democratic governments and some of that will create civil disruption. I think that’s a given,” he says. It is up to brokers then to ensure their clients are prepared for the risks that a more politically unstable world presents to their businesses.

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Copyright 2013 Rogers Publishing Ltd. This article first appeared in the August 2013 edition of Canadian Insurance Top Broker magazine.

Transcontinental Media G.P.