Opinion: The complications of insuring war risks on land

Zoe Towndrow, Practice Lead, Political Violence, at BPL Global, looks at the gaps, overlaps, and almost genetic differences, between the PV and PRI markets when it comes to insuring war risks on land.

Back in June, I had the pleasure of presenting to the BU MLT Committee on the synergies, overlaps and differences between Political Violence (PV) and Political Risk (PRI) and their respective insurance markets.

Ukraine has reminded us that general market property insurance policies do not cover war. We reckon less than 1% of the estimated $130 billion plus of property damage suffered by Ukraine in the first year of the war is covered by insurance. That percentage will only shrink further in 2023 and beyond as cover is no longer available in Ukraine. However, war risks cover is available elsewhere from two separate silos in the specialist insurance market: the Terrorism and Political Violence (PV) insurance market, and the Political Risk Insurance (PRI) market also known as the Investment Insurance market. But which of the two separate silos of the specialist insurance market that do offer cover for war risks on land should buyers turn to?

First though, what are a buyer’s requirements of a war risk policy? Based on our experience of war risk claims we believe buyers have at least three requirements:

• Damage repair cover: To respond when it is possible to gain access to repair and replace property damaged in a war, together with the corresponding business interruption for the period until replacement is complete.
• Total loss cover: To come into play if an ongoing conflict means you have had to abandon your property (even when it is undamaged) or you cannot access it to repair damage, or if your property has been ‘taken’: captured or seized by enemy forces or indeed expropriated by the victors, a huge area of war risk losses historically.
• Long term, non-cancellable cover: Because private insurers are not going to renew your policy once war breaks out, as the Ukraine has shown.

However, sadly, neither of the specialist markets for war risks on land provide a complete answer. The PV market offers damage repair cover at replacement cost, plus business interruption. But when it comes to the total loss cover, they exclude forced abandonment of property and exclude capture, seizure and expropriation. And while their policies are non-cancellable, they are short term annual contracts, even when covering war.

In contrast the PRI market offers long term non-cancellable policies. And likewise the market is effective when it comes to total loss cover as they usually cover forced abandonment and the taking of property (even by an invading government). However, the PRI market comes up short if you want to replace damaged property: cover for damaged property is typically limited to indemnity for book value (not replacement cost) and with no cover for business interruption, which could be a big number if you can only repair at the end of an extended war.

Why are both market silos coming up short when it comes to cover for war risks on land? Why does neither offer an overall solution? The answer lies in history. You have to remember that insuring war risks on land was traditionally banned in the insurance industry under the 1936 War Risk Agreement, which restricted the writing of war risks to ships and aircraft – because they were mobile. Land based property could be covered for civil unrest and terrorism, but conflicts – starting with insurrection and rebellion and extending up to war – were strictly excluded. It is only in recent decades that an element of war risks on land cover has become available from private insurers with first the PRI market and then the Terrorism and PV market joining the other specialist war risks silos for Marine and Aviation war risks insurance.

The Terrorism and PV market has focused on the lower end of the war risks spectrum and avoided writing the more extreme end. After all, this specialist market only began to grow into a market of significance after the general property insurers stopped writing terrorism cover after 9/11 (except when backed with government support). Terrorism has been the focus of the PV market since then, but that is the area of the war risks spectrum that recently has caused the least amount of property damage. Civil unrest losses have exceeded terrorism losses by a factor of 10 times in recent years and they are now also a focus of the PV market.

The market provides a very valuable service at this lower end of the risk spectrum by providing large capacities at economical rates. However, with 50 plus conflicts around the world in recent years (not just in Iraq, Afghanistan, Syria, Yemen and of course Ukraine, but in many other areas), property losses due to conflicts and wars have exceeded terrorism losses in dollar terms by a factor of well over 100 times recently, and the PV market has been far more cautious in this area. Yes, the PV market has extended its offering up the spectrum to include damage repair losses for war. But until it offers cover for the total losses that flow from the abandonment and the taking of property in wars, and until it offers longer term non-cancellable policies, the market will fall short of offering war risks insurance that meets the real needs of buyers.

Meanwhile the PRI market has focused on the strategy of writing for recoveries: expropriation, currency inconvertibility and host government breach, all offer the prospect of recoveries in the longer run and justify both public and private insurers offering cover for significant capacities under long term non-cancellable contracts. But political violence losses are usually not recoverable, and this explains why both public and private insurers in the PRI market have been and remain shy about this area.

So, to conclude, these two areas of insurance have much in common, not least because of their shared perils. However, closer examination has revealed two markets which are as genetically different as apples and oranges. Realistically, it is improbable that these markets will ever unify. The best one can hope for is that each market learns from and appreciates the true value of the other in order to provide the best solution for the policyholder.