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The evolution of political violence losses

March 7, 2016

Geopolitical risks are impacting claim frequency and severity.

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The world has moved on from the global financial crisis of 2008-2009 and the resulting credit losses suffered by companies around the globe. Since 2010, insurers that operate in the political risk insurance (PRI) market have experienced a claim landscape dominated by several regional geopolitical conflicts. These conflicts have resulted in a marked increase in the frequency of PRI losses suffered by our customers.

The recent spike in the number of PRI losses is further distinguished by the high concentration of those losses caused by political violence events compared with other types of PRI perils, such as expropriations and sovereign/sub-sovereign payment defaults. (That being said, the latter is beginning to creep back due to the recent trough in commodity prices, among other reasons.)

Over the past five years, conflicts in countries such as Libya, Ukraine, Yemen, Ivory Coast and Central African Republic have led to an increased number of indemnity payments to our PRI customers that had political violence coverage. These conflicts are indicative of the reality that civil war, ethnic intrastate fighting and international clashes have increasingly become part of our business environment. According to the Center for Systemic Peace, levels of both interstate and societal warfare have increased since the mid-2000s and show few signs of abating.

In addition to the higher frequency of political violence events, we have also seen an increase in the duration of these conflicts. In years past, many political violence losses were caused by short-lived events such as politically motivated riots or terrorist attacks. Recently, however, an increasing number of these conflicts have persisted for months, and sometimes years. The ongoing turmoil in Ukraine and Yemen are prime examples of the changing nature of political violence. As a result of this environment, we have observed an increase in severity of political violence losses suffered by our customers as well as the frequency.

The trend toward prolonged geopolitical risks extends and, in some ways, heightens the uncertainty under which a company must operate. A key retail outlet or major factory can sit idle for years, leaving the parent company in the dark about the facility’s future viability. For some companies like those in the energy sector which operate in resource-rich countries, the consequences of political violence can be even greater because major investments are left behind, leaving in question their very rights to the resources. For those with PRI, an indemnity payment for such losses can mean the end of the uncertainty, at least in terms of the investor’s balance sheet.

The pace of political change and the intensity of conflicts in certain parts of the world have taken many international companies by surprise. The risk of operating overseas is heightened by the inability or unwillingness of the international community to resolve these conflicts in a timely manner.

The increase in frequency and severity of political violence claims lends added support to the value of protection that PRI can provide, even in these stressful and volatile times.

As international firms scan the risk horizon in the emerging markets, they would be well served to consider how political risk insurance could mitigate the risks of facing more severe and prolonged conflicts than has been seen in the past.