The Algerian government reported 32 kidnappers and 23 hostages were killed during the attack while 107 foreign nationals and 685 Algerians were released. William Miller, divisional director at Special Contingency Risks, a specialist kidnap and ransom (K&R) insurance broker, believes the attack will have a material impact on underwriting strategy for K&R insurers covering risks in the Maghreb region in the north-west of Africa and the Sahel region between the Sahara Desert and Sudanian Savannas, despite risks in this area being well understood.
Political violence incidents have increased markedly since 2009. There has been a notable shift in buying behavior from clients looking for pure terrorism coverage to policies that also cover political violence, civil unrest and K&R. Capacity has increased in the K&R and political violence industries but remains relatively static for pure terrorism cover.
In a report released last spring, Lockton estimated the capacity available in the markets for terrorism and political risk was $2.5bn, with the Lloyd’s and London markets able to commit $1.5bn. The broker said the main Lloyd’s markets for these risks are Hiscox, Catlin, Ascot, Amlin, Talbot, Liberty, Beazley, Chaucer, Pembroke, Brit and Atrium, while the main company markets are Axis, Lancashire, Chartis, Montpelier Re, QBE, Inter Hannover, Torus and Ace.
Unsurprisingly, the market for K&R, terrorism and political violence is extremely volatile and some risks are arguably unquantifiable. Michael Burle, war and terrorism underwriter at Liberty Syndicates, explains that risks and their location usually change very quickly. “Tension in or around the Gaza Strip is also an example of a changing situation. This can and has changed market rates literally overnight,” he says.
The January Algerian hostage incident caused insurers to upgrade their risk forecasts for countries in the Sahel and Maghreb regions to extreme, and to amend their regional premium rates. “Insurers have stressed that it is essential for business going forward that relevant underwriting information be provided at policy renewal on any future plans or exposure in the region," says Miller at Special Contingency Risks.
Kidnap and ransom
Kidnapping incidents rose by 9% in 2010 and 2011, reported the global risk management and security company Red24. In 2012, South America saw a high number of K&R incidents and this is expected to continue into 2013. Mexico was a particular hotspot with an estimated 3,000 incidents in the first three quarters of 2012, Red24 says. The traditional K&R market was established to deal with the high level of kidnapping in Latin America, explains Ted Jones, CEO of Nescott Global Solutions (NSG), a dedicated political, natural disaster and medical evacuation provider.
However, there has been a small decrease in traditional kidnap-for-ransom kidnapping and an increase in “express kidnappings”. This generally involves people being abducted, robbed and forced to withdraw money from a cash point or hand over their PIN details. The abduction usually lasts a few hours, but can last days. Express kidnappings in South America are predicted by Red24 to increase in 2013. They increased 60% from 2011 to 2012 in Quito, Equador. From January to August last year 349 express kidnappings were reported in Guayaquil, Ecuador. Increases were also seen in Guatemala, Honduras, Venezuela and Brazil during the year. The Brazil 2014 Fifa soccer world cup is only expected to intensify these issues as local gangs target tourists.
Frances Nobes, global risk analyst at Red 24, explains there is a slight decrease in reported traditional kidnap-for-ransoms for a few South American countries largely a result of a high non-reporting rate. He says: “The majority of incidents go unreported due to fear of retaliation by the perpetrators. Additionally, the number of express kidnappings has increased significantly across the region, showing the changing methods of and threat from kidnappers."
However, Tim Holt, head of intelligence for Alert: 24, a crisis management consultancy, said recently on a Willis blog: “The seeds of dissent sown by Al-Qaeda and its franchises continue to foment violence globally, potentially converging across the Sahel. Unsurprisingly, business installations, locals and foreign nationals operating across the region are targeted, the risk of attack and kidnap-for-ransom is extreme.” Nobes agrees with Holt, describing the post-Arab Spring environment as, “fertile ground for the proliferation of kidnapping”. He says: “Countries that had previously witnessed kidnappings only rarely, including Egypt, Libya, Lebanon and Syria, saw a marked increase in 2012.”
“Several journalists and aid workers who were in the country during the unrest were kidnapped in Bani Walid and Benghazi. Similarly, a number of foreign visitors were kidnapped in the Sinai region of Egypt, primarily by Bedouin tribesmen, during and after the civil and political unrest that occurred in the country in 2012. The threat of kidnapping in Libya and Egypt, particularly in the latter’s Sinai region, is expected to persist in 2013."
Despite these growing risks, Simon Low, head of political risks and crisis management at Lloyd’s insurer Canopius, reports seeing a big increase in insurance companies entering the K&R market. Companies buying the coverage often tend not to publicise it as employees have been known to make false kidnapping claims. Paying ransoms is also illegal in several countries.
Demand for services such as those provided by NSG has increased “10,000 fold”, says Jones. Expat insurer Clements Worldwide is also seeing more demand for their services. Yan Bui, an account executive at Clements Worldwide, says aid and government organisations and the oil and gas industries are some of the largest buyers of K&R coverage. “Because of the Arab Spring, we have seen the market contract a little recently,” Bui says. “Some carriers are putting limitations on what their policies cover, particularly in regards to evacuations.”
The majority of K&R policies have average limits in the range of $5m-$20m limits while a political violence policy would have a typical range of $25m to $100m, according to Low, though the market is capable of writing limits up to $2bn in a desired location. Bui at Clements Worldwide says: “Any excess over about $15m would be reinsured. Some Fortune 500 companies may require higher limits which they often self insure.”
Corporates working in developing nations, in oil or gas for example, would generally seek three policies. One for political violence to cover property and business interruption risks, another for accident and health insurance covering the same political violence perils. The third policy would be K&R cover protecting employees. A client would usually buy a family or corporate policy with relatively modest limits.
Quantifying political violence and terror
Political violence is arguably less quantifiable than K&R exposures. Actuaries find it difficult to rate both K&R and political violence as there is a lack of historical data, therefore additional resources like consultants, research and risk data are needed. However there is more historic data for K&R risks than political violence. Managing exposures and systematic risk is particularly challenging when covering political violence and in areas where there is a lack of capacity purely because of the unknown, says Piers Gregory, global product head for political violence at Ace.
“Events like Oslo 2007 are very difficult to quantify, where you have an individual who can access information on the internet about how to make bombs on his own. This type of an event is a real concern for insurers,” he says.
About $2.5bn has been paid in claims by the political violence market since 2007, a recent Willis report stated. Paul Davidson, CEO of Willis financial solutions estimates between 2000 and 2006 the market paid between $1.25bn to $1.50bn in claims. “During this period the market had significant losses in Argentina, Venezuela and Dominican Republic,” he says. However, the market continues to perform well and grow in capacity.
The Arab spring is a big part in the growing losses. Marsh reported that political violence rose by 36% from a year ago. In 2012, 28 out of 197 countries were cited as experiencing “escalating political violence” by Marsh in its latest political risk map. This year 38 out of 197 were given the label. There was a big surge in demand after 9/11 for pure terrorism coverage that tailed off several years ago, explains Gregory. “The Arab Spring has caused another spike in demand, but not for pure terror cover this time. There is much more focus around civil unrest. That is the main change in the market. This is across all regions, not just across the Middle East,” he says. He says the reinsurance market has evolved in the same way and was previously quite limited.
Political situations in a country can change overnight resulting in higher threat levels and higher losses. “When enquiries do come in, we write risks for 12 months but we need to consider how quickly political risks change,” says Burle. For example, two Australian journalists were recently evacuated from Cairo airport to Libya after civil unrest broke out. The operation had to be completed by NSG in 15 minutes who were only notified as the clients were landing in Cairo airport. The operation cost $10,000.
There were more war and terrorism incidents and claims in the last three years than in the previous 12 years, Lloyds recently revealed. In more emerging markets, like Egypt or Bangkok, insurers will have a limited amount of aggregate they can use in these cities. However, Burle said: “Over the last five years there has certainly been an increase in capacity to the war and terrorism markets inside and outside of Lloyd’s.” But perhaps the market still has more growing up to do as a recent Ace survey noted that less than 10% of European corporates have specific terrorism cover for these risks.
By Vicky Beckett – firstname.lastname@example.org