Political Violence / Terrorism Insurance & Reinsurance Products Pizzaro Lukhanda, Resident Underwriter- Zambia & Malawi African Trade Insurance Agency: Lusaka, 19 April, 2016

South Africa

Zambia

Malawi

Egypt, Ivory Coast, Tunisia & Libya Following the uprising in Libya, claims of over USD 500 million were recorded by the Chinese Export Credit Agency Sinosure!

So what did all those images tell us? ● Politically motivated violence is prevalent in Africa. This has led to large scale loss of life and property ● Not all participants in violence are politically motivated, some are motivated by other considerations ● These are the looters, the opportunists, who exploit a situation for personal gain

Can we predict when PV will occur? ● In Africa, a great trigger for political violence is elections – in fact, the insurance of PV in East Africa virtually took off following the post-election violence in Kenya. ● What about the rest of the world? The Arab Spring sought to bring about the downfall of elected or autocratic leaders, the violence in Iraq and Russia is triggered by ethnic causes, while violence in Syria, Yemen and some other countries have been due to a mixture of Political Violence and Terrorism

The phenomenon of Terrorism

● Unlike PV, Terrorism can raise its ugly head anywhere, anytime. Whether it is State-sponsored or effected by ideological organizations, causes will always be found and they can strike anywhere. ● Hence, protection is required from these two classes of occurrence, and our purpose today is to discuss the protections that insurance can give.

Impact and Cost of PV T&S

Impact of PV T&S on Business Here, let us discuss the effects on: 1.Loss of Life 2.Loss of Property 3.Business Interruption 4.Increased Cost of Working 5.Third Party Liability

Cost of terror incidents affecting property ● 9/11 – The attacks on the Twin Towers in New York – estimated to cost US$ 50 billion = circa KES 5 trillion = circa ZMW 500 billion ● Westgate tragedy, Kenya – Estimated to set insurers and reinsurers back by US$ 30 million ● Air India Flight 182, downed in 1985 – the cost of the trial alone cost Canadian Dollars 105 million! 329 passengers and crew expired

Available Products

LMA 3030 (1) ● Covers Terrorism and Sabotage Risks only ● Act of Terrorism means an act or series of acts, including the use of force or violence, of any person or group(s) of persons, whether acting alone or on behalf of or in connection with any organization(s), committed for political, religious or ideological purposes including the intention to influence any government and/or to put the public in fear for such purposes. ● Sabotage means a subversive act or series of such acts committed for political, religious or ideological purposes including the intention to influence any government and/or to put the public in fear for such purposes.

LMA 3030 (2) ● This cover is suitable for risks located in remote areas, like power plants, factories etc. ● Excludes any property that is outside the insured premises ● Excludes Goods in Transit ● Occurrence – loss or series of losses occasioned by one Act or series of Acts during any period of 72 consecutive hours

AIG PTS (1) The Insurers will indemnify the Insured for its Loss in excess of the Deductible, but not exceeding the Limits of Liability, resulting from the following incidents, and any ensuing fire damage, damage from looting, or other damage caused by an act of a lawfully constituted authority for the purpose of suppressing or minimizing the consequences of any of the following incidents, during the policy period: ● Terrorism ● Sabotage ● Mutiny, Insurrection, Rebellion, or Coup d'Etat ● Strike, Riot or Civil Commotion

AIG PTS (2) ● Both Physical Damage and Business Interruption can be covered under one form ● Major exclusion War and Civil War ● You cannot delete or add any cover from this policy ● "Mutiny" means a willful resistance by members of legally armed or peacekeeping forces to a superior officer

AIG PTS (3) ● "Insurrection" means a violent rising of citizens or subjects in resistance to their government. ● "Rebellion" means a deliberate, organized and open resistance, by force and arms, to the laws or operations of a government, committed by its citizens or subjects, including acts committed in the furtherance of a revolution. ● "Coup d'Etat" means the overthrow of an existing government by a group of its citizens or subjects. ● "Strike" means a work stoppage by three (3) or more workers to enforce demands made on an employer or to protest against an act or condition

AIG PTS (4) ● "Riot" means a violent disturbance by three or more persons assembled together which threatens the public peace. ● "Civil Commotion" means a substantial disturbance of the public peace by three or more persons assembled together and acting with common intent ● The Business Interruption section is specifically extended to cover when access to the Insured Locations is prohibited by order of civil authority as a direct result of damage to adjacent premises, not exceeding, however, two (2) consecutive weeks.

AFB (BEAZLEY) - (1) COVERED CAUSES OF LOSS 1. Act of Terrorism 2. Sabotage 3. Riots, Strikes and/or Civil Commotion 4. Malicious Damage 5. Insurrection, Revolution or Rebellion 6. Mutiny and/or Coup d’Etat 7. War and/or Civil War

AFB (BEAZLEY) - (2) ● Perils here can be deleted and appropriate discounts given ● Typically quote is given for full PV cover, that includes War and Civil War. Deletion of Peril No. 7 can usually fetch a discount of between 10 ~ 20% ● "Malicious Damage" shall mean all physical loss or physical damage resulting directly from a malicious act by anyone during a disturbance of the public peace where such malicious act is perpetrated for political reasons by known or unknown person(s).

AFB (BEAZLEY) - (3) ● Exclusion 14 is worth noting: “Loss or damage directly or indirectly caused by burglary, house-breaking, theft or larceny, looting, pillaging, mysterious or unexplained disappearance of property insured hereunder or directly or indirectly caused by any person taking part in any such activity.” ● Deletion of the word ‘Looting’ in this clause can be done at additional premium

Reinsurance of Terrorism Portfolio

Various options available 1.Facultative Reinsurance 2.Quota Share Treaty 3.Surplus Treaty 4.Excess of Loss Treaty

Facultative Reinsurance ● Reinsurance for each risk separately ● Information pack to be provided to reinsurer/s, containing proposal form, full details of security at site, details of neighboring properties ● Good features like strong access control, compound wall, CCTV have the potential to fetch discounts

Quota Share Treaty (1) ● Primary insurer and the reinsurer use a fixed percentage in sharing the amounts of insurance, policy premiums, and losses (including loss adjustment expenses). ● Quota share reinsurance can be used with both property insurance and liability insurance but is more frequently used in property insurance.

Quota Share Treaty (2) For example, an insurer may arrange a reinsurance treaty in which it retains 45 percent of policy premiums, coverage limits, and losses while reinsuring the remainder. Such a treaty would be called a “55 percent quota share treaty” because the reinsurer accepts 55 percent of the liability for each loss exposure.

Quota Share Treaty (3) ● Insurer must decide on his retention first, how much he can afford to write on his net account, and thereafter settle on the cession limit. ● Reinsurers normally will not accept more than 90% Q/S, so if the insurer retains $10,000, the reinsurer can take $90,000, giving an overall limit of $100,000. ● Risks that have sum insured greater than $100,000 will need to be insured separately

Surplus Treaty (1) Surplus share reinsurance is that when an underlying policy’s total amount of insurance exceeds a stipulated dollar amount, or line, the reinsurer assumes the surplus share of the amount of insurance (the difference between the primary insurer’s line and the total amount of insurance). Surplus share reinsurance is typically used only with property insurance.

Surplus Treaty (2) ● How does the Surplus Share work? ● Say Sum Insured is $ 250,000 ● Insured retains $ 50,000 and Cedes $ 200,000 ● Here insurer will receive 20% of the premium (50,000/250,000) ● Similarly he will pay 20% of all losses ● Reinsurer will receive 80% of premiums and losses accordingly

Excess of Loss Treaty (1) ● Quota Share and Surplus are what we call Proportional Treaties, and premiums and claims sharing is decided on the basis of Sum Insured ● Excess of Loss Treaty is one of the Non- Proportional Treaties, where premiums and claims are decided on the basis of losses

Excess of Loss Treaty (2) ● Insurer must decide what is the maximum loss he can take on his net account ● This amount will be the Excess Point, and layers of reinsurance can be built on top of this excess point ● Assume Insurer decides on a maximum net retained loss of $ 10,000 ● The maximum potential loss as per his risk register is $ 500,000

Excess of Loss Treaty (3) The highest sum insured per his premium register is $ 200,000. In such situation, reinsurer can create layers like this ● Layer 1 (Risk only) $ 40,000 excess of $10,000 ● Layer 2 (Risk cum Cat) $150,000 excess of $50,000 ● Layer 3 (Cat only) $ 300,000 excess of $ 200,000 Layer 1 is called the Working Layer, and usually the greatest number of claims will fall in this layer. Thus the pricing is highest for this layer. Depending on the historical losses and the type of risks that are fed into this treaty, reinsurers can look at paybacks as low as 2 years, which means, they can charge a premium of $20,000 for this layer alone.

Rating a PV T&S Policy

Rating (1) Depends on: 1.Business Volume 2.Historical Losses 3.Threat Perception 4.Coverage requested In Africa, other than South Africa and Namibia, the volumes are very low, and hence, coupled with a high threat perception and poor statistics of losses, the rates are much higher than most so-called developed countries.

Rating (2) ● How to bring down the rates: Pools are the best way to go. If a Terrorism Pool can be set up, premium from all companies can be thrown in, and the losses can be paid out of the Pool. This will make a significant difference, as SASRIA and NASRIA have shown in Africa.

ATI Headquarters Kenya-Re Towers | Upperhill, Nairobi ATI Tanzania Office 1st Floor, Private Sector Hs | Mwaya Road Dar es Salaam ATI Uganda Office Workers House, 9th Floor Southern Wing Plot 1 Pilkington Road | Kampala ATI Zambia Office Kwacha House Annex | Cairo Road Lusaka ATI Contacts Africa’s Export Credit Agency