Riots and political violence, a growing but unpredictable risk
Periods in which social discontent and political demands overflow the bounds of peaceful protest and lead to violence are a constant throughout history. Along the way, they leave after-effects that have a major impact on the insurance industry, which has seen an increase in losses caused by such events in recent years, from the yellow vests in France to Black Lives Matter in the United States, as well as riots in Peru, Chile and other Latin American countries.
In the insurance world, this type of harm and the coverage it involves is known as SRCC, which stands for strikes, riots and civil commotion. The main problems faced by the insurance industry with these risks are, first, the great destruction they can cause and, second, their unpredictability.
- They are potentially devastating
Among the biggest public disorder events in recent years, one of the most media-worthy was the riots across the United States that followed the death of George Floyd at the hands of police in 2020. The protests resulted in acts of vandalism in more than a hundred cities across the country, costing the insurance industry an estimated $1.5 billion.
Despite this, it is not the largest event in recent years. In 2021, the arrest in South Africa of former president Jacob Zuma sparked protests that, inflamed by discontent over the economic situation and racial tensions, eventually unleashed a wave of violence in the northwest of the country. Hundreds of stores, shopping malls, factories, and other property and infrastructure were looted and burned, leaving an estimated cost to insurers of some $1.7 billion.
- An unpredictable risk
Despite the spontaneous – and therefore unpredictable – nature of many risks, insurance bases a large part of its activity on putting them into figures and modeling them, which can be done with claims, accidents or even extreme natural events. In the case of social unrest, and despite the fact that companies dedicated to these major risks have political risk analysts, projections for this type of event are extremely difficult.
There are indicators that influence this risk, such as the proximity of elections in countries where political violence is more frequent, and of course deeper causes, such as a poor economic situation, but the events that finally light the fuse are very diverse. The Arab Spring, which shook and toppled governments across the region a decade ago, also leaving millions in damages, began after the confiscation of the merchandise of a street vendor, who later blew himself up in protest.
A global phenomenon on the rise
Different studies of the insurance sector have found that there is an increase in indemnities arising from social conflicts, a trend confirmed by Javier San Basilio, Deputy General Manager at MAPFRE RE. “In damages related to coverage of strikes, riots and civil commotion, we have recently seen an increase in their frequency, intensity and cost,” says San Basilio.
This increased frequency is leading the industry to rethink the way in which SRCC risks are hedged, with more precise definitions of coverage and their allocation to specific political risk contracts. It is a move similar to that which came after the 9/11 attacks, when damage from terrorist attacks was excluded from the vast majority of general policies, and began to be covered jointly by pools of insurers in order to mutualize the risk.
These pools already operate in many countries also for political risks. This is the case in Spain, where the Insurance Compensation Consortium is responsible for covering damage “caused violently as a consequence of rebellion, sedition, riot and popular unrest.” This is the common fund of private entities that covers damages of this nature that would otherwise economically destabilize a company if they reached a magnitude such as that of the events seen above.
Clarity and predictability: the keys to dealing with the phenomenon
“The insurance industry needs clarity and predictability to deal with this growing and constantly evolving risk,” explains Javier San Basilio. According to the experts at MAPFRE RE, MAPFRE’s reinsurance unit, the appropriate response requires clarifying this type of coverage; appropriate pricing, since in times of a “soft” market, SRCC coverage was offered at almost no additional cost; limitation of the possible impact, given the special concern generated by any global systemic event; and collaboration with the various national authorities to establish risk management mechanisms, such as specialized pools.
The need for clarity in contracts is vital for a phenomenon such as political violence, which is in principle more abstract than other types of coverage and, in the absence of a precise definition, can give rise to diverse interpretations. This is what happened after the massive demonstrations and riots in Indonesia in 1998, which caused some $250 million worth of material damage.
Political risk was not covered in most insurance contracts, which were largely ceded to international reinsurers, so the sector was not so seriously affected at first. But the local regulator ruled that the unrest was not politically motivated, in a hotly contested ruling – the anti-government protests that took place at the time ultimately led to the resignation of President Suharto. The reinsurers eventually paid the indemnifications, but following a demand to introduce new clauses for future contracts to settle this debate.