FINANCE: New Cover Against Threat from Terrorism

By Sanjay Suri Reprint | | Print |

Sanjay Suri

LONDON, Sep 24 2003 (IPS) - After 9/11 you would have thought that if anyone gains, it would be insurers offering a new cover against terrorism to just about everyone. The worse you think it can get, the better for an insurance company selling a policy.

After 9/11 you would have thought that if anyone gains, it would be insurers offering a new cover against terrorism to just about everyone. The worse you think it can get, the better for an insurance company selling a policy.

But it has not quite worked out like that. "Paradoxically, major corporations have even less political violence coverage in place today than they did prior to 9/11," says Charles Berry, chairman of the BPL Global insurance company. The company has been formed by several underwriters who have come together to offer the new cover.

"General property insurance policies have always excluded war and related risks," he says. "They now usually exclude terrorism. So, many corporations have no cover for any form of political violence, particularly for their emerging market assets."

Will developing markets therefore get less investment because companies cannot get a proper cover for their assets?

The link is not that direct, or that dramatic. "There has been a slackening of investment in the developing world in the last year or two," Berry told IPS Wednesday. "But that is more a general phenomenon."

The link is difficult to quantify, he says. "Banks usually ask companies if they are covered, occasionally whether they are covered for terrorism and political violence," he says. "It makes it a lot easier if you can answer these questions adequately, insurance makes the world go round, but how do you quantify this?" The only thing certain is that such a cover is "a good thing" to help investment.

"Investment is not drying up, but it’s fair to say that the majority of assets in the developing world since 9/11 have no political violence cover," Berry says. "That is the issue."

In time such covers would be available for new investment in a place like Iraq. "We are focused more on permanent investment," Berry says. "At the moment, the investment going into Iraq is contracting and mobile investment, for which political risk insurance is available."

The impact on Iraq will not be immediate, he says. "I don’t think there is a pile of direct investment for Iraq waiting for the right insurance cover to turn up. When the situation settles down, investment will go in, and then it will be easier to finance if the right kind of insurance is available."

London has taken the lead in offering the new insurance. "Since 9/11 we have seen a large volume of stand-alone political violence business coming to London, mainly seeking to add back the terrorism risk, now excluded from the general property insurance," says Stephen Ashwell, underwriter at Hiscox Syndicates Limited. "We want to develop this book further."

Most of the cover offered by companies at present is for acts of terrorism in the developed world. Governments in several Western countries such as France, Germany, Britain and the United States in any case further underwrite risks to property from political violence.

The underwriters at Lloyd’s of London, the world’s leading insurance market, have come together now to support policies that cover political violence beyond acts of terrorism, and provide that cover in the emerging markets.

Obvious examples of areas where such a cover will be offered are Indonesia, the Philippines, Colombia and various parts of Africa, Berry says. "But we do not encourage our clients to second guess where the losses are going to be," he says. "You can have a terrorist incident in Indonesia, or in Spain. If the risk is higher in Indonesia, the premium will reflect that. But if there are significant assets, companies should seek cover everywhere."

The advantage to insurers in offering such arguments is obvious. But the underwriters say the special risk market is badly needed after the 9/11 scenario. The 9/11 attacks hit the general insurance, not the special risk cover market, and most general insurers do not want to include terrorism and political violence in a general cover any more.

Could the new insurance cover make products costlier, or the companies less competitive?

"It is difficult to say how a product will be priced, because that depends on the country, and how exposed the assets are," Berry says. "But most products in the insurance market are priced in three ranges, of 0.1 percent, 1 percent and 10 percent," he says. "These products are in the 0.1 percent range."

The new insurance on offer covers a range of political violence, but it stops short of cover for a nuclear exchange, radioactive contamination, war between two or more of the permanent members of the United Nations Security Council (the United States, Russia, China, Britain and France), biological or chemical attacks.

But the insurance underwriters are agreed that things can get so bad that companies have to leave after facing violence. For that, they have produced an Abandonment of Operations cover.