A political violence report from Howden Tiger warns that insured losses from strikes, riots and civil commotion in certain hot spot territories now comparable to major natural disasters.

Riot control

A report from Howden Tiger highlights reduced risk appetite in the political violence (PV) insurance market caused by an unpredictable threat landscape.

Unrest in South Africa and Latin America has seen the value of strikes, riots and civil commotion (SRCC) claims rival or even surpass major natural catastrophe losses, the broker warned.

The PV loss profile has shifted in recent years, the report reveals, with re/insurers suffering more than $10bn of SRCC losses since 2015, versus under $1bn for terrorism claims.

Growing discontent across the globe has sent SRCC costs spiralling to the point where they can impede economic growth or even trigger recessions, Howden Tiger suggested.

The Ukraine war has also exposed considerable geopolitical risks, with the conflict set to become one of the biggest PV losses on record.

Standalone PV pricing is undergoing a correction as a result, the study explained, rising by more than 80% since 2018.

Reinsurance market hardening

The correction in the PV market is likely to continue for much of this year, Howden Tiger’s report suggested.

Pressures have compounded by considerable tightening in the reinsurance sector during 1.1 renewals.

Retentions and pricing doubled in certain instances, Howden warned, and considerable reinsurance protection was lost overall.

“Treaty reinsurance appetite in this class declined at 1 January 2023, particularly for upfront carriers unwilling or unable to meet future treaty pricing expectations,” said Steve Bessant, executive director, Howden Tiger.

“The change was driven by the five key treaty reinsurers who, after recently sustaining disproportionately large losses from both standalone and all-risk policies, refused to continue on previous unprofitable conditions,” Bessant said.

“The effect of this change varied by peril, with capacity commitments reducing for SRCC and full PV by as much as 30% and 60%, respectively, and pricing increasing significantly across the board. Event definitions and terms and conditions likewise tightened at 1 January 2023, as treaty reinsurers reduced exposures, particularly in the contingent business interruption space. These dramatic changes have cascaded down the value chain, forcing original insurers to pass on restricted wordings, higher costs and deductibles to buyers,” he added.

Underlying grievances

Discontent linked to inequality, the cost of living crisis and broader disenfranchisement, combined with the lasting economic effects of Covid-19 and Russia’s invasion of Ukraine, have elevated SRCC risks in both advanced and emerging economies and caused a historic reset in the standalone PV market, the report argued.

Recent outbreaks of violence in Chile, the US, South Africa and Peru reflect a highly dynamic and interconnected risk landscape. These events saw violence spiral quickly to affect multiple locations and are indicative of rising discontent globally, as demonstrated by other incidents of unrest last year in Iran, Kazakhstan, Sri Lanka and Argentina.

2023 has offered little respite, with protests in France and Israel hitting the headlines in recent weeks. All of which has reset insurers’ views of risk.

Property insurers are increasingly withdrawing SRCC cover whilst risk appetite in the standalone market has reduced significantly. The fallout represents something akin to a perfect storm – demand up, supply down, triple-digit loss ratios and reinsurance retrenchment – resulting in a market-changing pricing correction.

Market pressures have been compounded further by the war in Ukraine, which in addition to causing one of the largest PV losses ever, has also exacerbated cost of living pressures and exposed other geopolitical risks that currently extend to rising tensions between China and the US.

Conditions have become more difficult, the paper suggested, but few areas of re/insurance have such an innate ability to respond to a rapidly changing threat landscape.

The step-change in losses and demand will require the market to scale up considerably over the next few years: Howden is leading the charge by leveraging expertise within our group and engaging with an array of market participants to entice more capacity into the market and secure the best outcomes for clients.

SRCC losses

The shift in loss profile has been stark, Howden Tiger warned.

Whereas major PV market-related losses were confined mostly to large-scale terrorist bomb attacks previously, multi-billion dollar SRCC events in Chile (2019), the US (2020) and South Africa (2021) have led to considerable payouts for insurers and reinsurers.

Increased frequency of severity has propelled the quantum of SRCC claims in South Africa and Latin America to rival or even surpass natural catastrophe losses.

This is not down to a lull in catastrophe activity, the report explained.

Both territories experienced a number of sizeable natural disaster losses during this time (including record-breaking floods in South Africa) – but a reflection of the unprecedented scale of civil unrest.

“Such devastating losses have precipitated a correction in the PV market that looks set to persist for some time to come. Clients can therefore expect to continue to encounter difficult market conditions in 2023,” said Tom Bradbrook, executive director, Howden Specialty.

“For the cover that is most sought after currently – namely SRCC and full PV – line sizes are being cut across the board and certain risks are difficult to place, especially in more volatile areas. Rates are up for all perils and territories, with our pricing index showing an average increase of 80% since 2018,” he continued.

“Now more than ever, risk transfer advice can make a crucial difference to renewal outcomes. With little prospect of a let up in market conditions, sector expertise, market-leading thought leadership and unrivalled relationships with insurers have never been more important. Howden’s PV team provides all this and more and we look forward to supporting clients in managing change and securing the best coverage available in the marketplace,” Bradbrook added.

PV watershed

This highly dynamic threat landscape has brought about the most significant recalibration to the PV market since its inception, the report suggested.

Pricing today is up more than 80% from its nadir in 2018, the report concluded.

Following a period of high profitability for the best part of two decades, 2019 proved to be a “watershed moment”, according to the broker’s report.

“Long-standing soft conditions, characterised by marked declines in pricing and strong competition, have been arrested by the series of losses that moved the overall market into the uncharted territory of underwriting losses,” said the report.

“After a prolonged period of sizeable rate reductions through most of the 2010s, pricing stabilised towards the end of the decade before the correction started to materialise in late 2020, accelerating rapidly into hard pricing territory in 2022.”