Not just an Economic Actor: the role of the Political Violence insurer in modern armed conflict

On the evening of 10 April 1992, the day after John Major had just been re-elected as British Prime Minister, a large white lorry attempted to park outside the Lloyd’s building.  It was swiftly moved on by security staff, and subsequently parked outside the offices of the Baltic Exchange in St Mary Axe.  At 9.20 pm the one-ton bomb inside the truck detonated, killing three people including a 15-year-old schoolgirl and injuring 91 more.  The bomb also caused ￡800 million worth of damage, ￡200 million more than the total damage caused by the 10,000 explosions that had occurred during the Troubles in Northern Ireland up to that point.

Just over a year later a similar device was detonated in Bishopsgate outside the offices of HSBC, causing not dissimilar devastation with an economic cost of some ￡350 million. 

In the aftermath of these bombings, most UK insurers moved to exclude terrorism from their commercial insurance policies. As a result (and once it had been realised by a number of composite insurers that this would mean that in the absence of full cover for Fire and Explosion they would no longer be able to show their investment property portfolios in their balance sheets) a compromise was reached between the UK Insurance Industry and the British Government.  In 1993 Pool Re was established as a reinsurer of last resort.

However the cover initially available under the Pool Re buy-back was restrictive – in particular an Insured could only insure a whole portfolio of property with no selectivity (the situation is now very different and Pool Re is a very much more flexible beast).  A number of London Market insurers saw this as an opportunity, and in 1994 the first standalone UK Terrorism facility was launched, led by Wellington syndicate 1028 and the predecessor company to today’s Liberty Specialty Markets; the author of this piece drafted the standard Policy form.

This was not of course the beginning or the end of the standalone political violence insurance market.  Underwriters had been giving cover for riots, sabotage and terrorism in Africa, Latin America and other emerging markets for many years before that and continue to do so to this day. Lloyd’s Underwriters were permitted to cover War on Land from 1997, rolling back the 1938 Waterborne Agreement. And post 9/11 a thriving market in Terrorism Insurance in the developed world took off and is still with us.  Thus, there is today a range of Political Violence policy forms covering everything from “pure” terrorism to broad form policies including the full spectrum of violence from riot through to war and civil war.

What this story highlights is the economic impact of political acts of violence.  Indeed the IRA’s attacks on the City of London (and subsequently, in 1996, Canary Wharf) were specifically intended to inflict damage on the UK economy.  This has been the calculus behind many terrorist atrocities around the world both before and since, not least the ISIS-sponsored attacks at the Bardo Museum and on the beach at Sousse in Tunisia this year – and also partly underlies Vladimir Putin’s current strategy in Eastern Ukraine.

The Economic Consequences of a Single Word

This can be further illustrated by a couple of other examples.  In his seminal history of the Malayan Emergency, The War of the Running Dogs, the author Noel Barber commented on the terminology used at the time, in particular referring to the crisis as an emergency not a war:

“It was a war but there is a curious reason why it was never called one.  As the author John Gullick, an authority on Malaya and one-time member of the Malayan Civil service points out, 'It was a war - though out of regard for the London insurance market, on which the Malayan economy relied for cover, no one ever used the word.'  This misnomer continued for twelve years, for the simple reason that insurance rates covered losses of stocks and equipment through riot and civil commotion in an emergency, but not in a civil war.”

And more recently in Bangkok in May 2010, the head of the DSI (Thailand’s analogue of the FBI) branded the actions of Red Shirt protestors dispersing from their city centre camp site as “Terrorism”.  The main stream P&C industry promptly took this as their cue to deny cover under the terrorism exclusion contained in most Thai property policies.  To put this in context, at the time only around 20% of Thai businesses purchased standalone terrorism cover, and even then available limits were lower than those offered for mainstream property insurance.

The Political Violence insurer is a “Financial Combatant”

What all this means is that, by offering cover where main stream markets have excluded it, the Political Violence insurer becomes not just an economic actor but a political actor.  She is intervening in the underlying conflict against which cover is being sought and doing so, generally speaking, on the side of the forces of law and order; the Good Guys in the white hats.  I believe that with the possible exception of Political Risk and the fast growing field that is Cyber, this cannot be said of any other class of business.

The Political Violence insurer becomes, in effect, a “Financial Combatant”, part of the solution not part of the problem. 

This introduces a profoundly different moral and ethical calculus in that, if the Insurance Policies work as advertised, then broken businesses are put back on their feet; employees are swiftly put back into gainful employment; and damaged communities rebuilt.  Conversely, if the Insurance Policies fail to perform then the insurer is arguably “aiding and abetting the enemy”...

To put this in perspective, one has to ask how different a trajectory the conflict between FARC and the government of Colombia would have been (standing as we do on the cusp of an historic peace deal) had private market political violence insurers in Europe (and London in particular) and North America not offered their reinsurance capacity to local Colombian insurers.

The corollary to this is that Policy forms need to be clear, which is not always the case: the definition of terrorism in these Policies includes the state of mind and intent of the perpetrator, which is, in turn, not always clear.  I am mindful of one case involving an RPG attack on an oil storage tank in Thailand where, with no claim of responsibility, it was unclear whether the incident was a political act or, as the RUC would have put it in the days of The Troubles, “ordinary decent crime”.  In this instance a sensible compromise was arrived at with All Risks insurers.

Finally, the claims response to an atrocity such as the September 2013 attack on the Westgate shopping mall in Nairobi needs to be prompt.  Additionally it needs also to be clear, coordinated and consistent.  We are fortunate in the London market to have a community of Political Violence underwriters and claims professionals who understand this, and a good example of this is the way the market responded to the issues highlighted by the 2010 unrest in Bangkok, in particular proposing an “Other Insurances” clause which inverted the norm by stating that in the event of there being cover available under another Policy, the Political Violence policy would respond first.  I call this the “First Responder” clause.

However, I remain concerned that in the event of another Political Violence incident of the severity of 9/11 (and I believe it is when, not if, especially now that we have Daesh competing with Al Qaeda for attention and support) or indeed somewhere else at the higher end  of the spectrum between Westgate and 9/11, the market may not have in place the machinery, communications infrastructure and response plan to ensure that the clarity, coordination and consistency that is required will be there. 

Shortly before Terrorism and Political Violence were included as classes of business in the first wave of CTP my predecessor at XCS, Marcus Ringrose, had put together with two of firms of loss adjusters the basis of a structure to give the market precisely that response (indeed we had preliminary discussions with representatives of ACPO and the ABI with the intention of ensuring Insurers would be represented and integrated at Gold, Silver and Bronze command levels), and unfortunately that initiative became a casualty of a change management project aimed at very different targets.  I am not aware of any market comprehensive initiative since then that replicates what we were trying to achieve.

I hope that when the inevitable happens we have the appropriate structures in place as a market and I will be proved wrong. 

George Johnston is the Chief Adjuster for Political Risk and Political Violence at Xchanging Claims Services.  In addition to delegated claims handling services, his team provides market claims coordination services to the Political Risk and Political Violence markets.  A shorter version of this post is published in the 2015 edition of the IIL Journal.