Ms Susan Dingwall and Mr Martin Schneider of Norton Rose Fulbright LLP discuss the key considerations for insurers writing political violence and terrorism in the light of changing threats.
The deteriorating security situation in parts of the Middle East in the last few years has highlighted the need for businesses operating in the region to identify whether they are adequately protected against existing and emerging risks by their political violence and terrorism insurance policies, and for insurers who provide such cover, or intend to do so, to fully appreciate how their policies will respond in light of the changing threats.
Development of the standalone terrorism insurance market
After the events of 11 September 2001 and the insurance claims arising from them, the insurance market was forced to adapt to the exclusion by insurers of terrorism as a peril from almost all all-risks property damage policies. This led to the creation and growth of a standalone terrorism and political violence market. The offering was initially very small, with only about US$164 million of capacity available in the London market through a small number of Lloyd’s syndicates.
The market has, however, expanded significantly since then, in both capacity and with respect to the breadth of cover provided by policies. This has largely been driven by the absence of any major losses and the movement of substantial capital into this sector of the insurance market by investors seeking yields that are higher than those available in other asset classes. There are now around 40 syndicates and companies operating in this class of business. In the third quarter of 2013, overall capacity in London alone stood at approximately $1.8 billion, with intense competition for market share amongst underwriters.
Premium rates have been falling for some time due to the increased capacity available, although the market for this form of cover has also expanded due to the recognition among global insureds that standalone terrorism insurance should be part of their risk management strategies. Capacity is carefully allocated depending on the situation on the ground, and with the Middle East accounting for 23% of all terrorist attacks worldwide in 2013 (according to the Aon political risk map), underwriting remains cautious. That being said, it was reported in May that there was still considerable interest in writing political violence business in parts of the Middle East and Africa as premium rates remained attractive.
Recent security developments
The rapid territorial gains made by Islamic State (also known as ISIS or ISIL) in Iraq and Syria provide a dramatic example of the escalation of risk in the region.
The situation in Iraq and across the Levant is likely to remain unstable, fuelled by sectarian and political conflicts in a number of countries, in the midst of which a non-state actor is expanding across national borders. The Islamic State’s tactics have included capturing economic interests such as oil fields and attempting to exploit these to fund its operations.
It has also targeted key infrastructure assets, such as the Mosul dam. Within such a fluid and uncertain environment, it is vital that an insurer operating in the region or underwriting local risks is aware of precisely how the policies it writes will respond, and the extent of its potential exposure.
Important considerations for insurers
Types of cover
Insurers need to ensure that they have sufficient information about the risk being insured, including security and business continuity planning. Other matters to review include the breadth of cover provided, given the propensity for events to change rapidly.
By way of example, types of cover can take the form of:
• Terrorism only, which covers losses or damage arising out of acts committed for political, religious or ideological purposes, including the intention to influence any government;
• Terrorism and strikes, riots and civil commotions, which in addition to terrorism covers losses arising as a result of civil unrest;
• Political violence excluding war and civil war, which in addition to the above risks covers physical damage arising out of a mass social uprising, revolt or military coup; or
• Comprehensive political violence, which provides all of the above forms of cover plus cover for war and civil war.
Context and definitions
Insurers should be alive to the context in which a policy was originally written as the risks in the region are clearly evolving and their exposure may, as a result, be wider than originally anticipated.
For example, the definition of an “Act of Terrorism” in the Lloyd’s standard wording (LMA3030) is “an act or series of acts, including the use of force or violence, of any person or group(s) of persons, whether acting alone or on behalf of or in connection with any organisation(s), committed for political, religious or ideological purposes including the intention to influence any government and/or to put the public in fear for such purposes”.
Other definitions, however, might refer to the acts of a person or organisation for the purposes of overthrowing a government, which is far narrower. Insurers should therefore review and analyse the definitions in their policies in light of the types of event which are occurring in the region, to ensure that policy concerned responds in the way that Insurers intended.
Due to the fluid nature of the situation on the ground, it may also be difficult to identify the event which leads to a claim, increasing the scope for disputes between insurers and insureds. It may, for example, prove difficult to determine whether a particular event causing a loss is an act of terrorism, civil war or civil unrest. In 2010, the Thai government called the protests in central Bangkok acts of terrorism, which led to a number of coverage disputes in cases where an insured did not have cover for terrorism but did for strikes, riots and civil commotion. Despite decisions having been made in a number of these types of cases, the issue of liability in future cases is likely to continue to give rise to disputes, given the widely differing factual circumstances which can lead to specific instances of property damage during periods of unrest.
Even where it is proved that the risk insured against exists, it is necessary for the insured to demonstrate that the peril caused the loss in respect of which it is claiming. Again, policy wordings can differ in determining the test for causation and insurers need to ensure that the causative link between the risk insured against and the loss sustained is not diluted.
Policy wordings
Linked to this is the need to ensure that definitions, insuring clauses and exclusions are clearly drafted to avoid any ambiguity and that they do not conflict with each other. In circumstances where identifying the factual position can be difficult, it is even more important that policy drafting is clear and unambiguous.
Insurers writing this type of insurance in the Middle East should carefully consider the locations of the risks they are considering insuring, and use exclusions to avoid covering operations in certain jurisdictions or areas, if appropriate.
While the security situation in the region varies hugely from one state to the next or indeed from one locality to the next, it can also change quickly due to the speed at which events are unfolding.
Conclusion
The economic potential and natural resources of the region mean that the Middle East remains hugely attractive to businesses, whether local or international, in spite of the security situation in the Levant and Iraq. In the absence of a major loss which might reduce the insurance market’s appetite for risk, it should be possible for insurers to provide tailored but adequate terrorism and political violence cover to companies operating in the region. However, insurers should carefully monitor the rapidly evolving nature of the risks, and analyse (and amend where appropriate) their wordings to ensure that they continue to meet their risk tolerances.
Ms Susan Dingwall is Partner and Mr Martin Schneider is Associate with Norton Rose Fulbright LLP.