What is covered? Distinguishing among political risk, political violence, and terrorism insurance
Politically motivated attacks and civil unrest continue to threaten global businesses’ operations, assets, and people. To manage the exposure, many multinational companies look to insurance, mainly political risk and terrorism coverage. The next question is usually what type of coverage to buy.
The line between what is considered “terrorism” and what is considered “political violence” can be blurry. Understanding how insurers and governments distinguish between the two should inform which of the three types of coverage to buy: political risk insurance, political violence insurance (PVI), standalone property terrorism insurance, or some combination.
Political risk insurance policies provide coverage for several risks, including political violence, expropriation, currency inconvertibility, non-payment, and contract frustration. Because rates for PVI and standalone property terrorism insurance are typically lower than those for political risk insurance, some multinational companies manage the risk of political instability and violence through a combination of the two, rather than through political risk insurance.
But it is important to remember that standalone terrorism insurance policies do not cover all forms of political risk. Expropriation, forced abandonment or divesture, currency inconvertibility, non-payment, and contract frustration will only be covered by a political risk insurance policy. And there may be some interpretation about whether a politically motivated act of violence would be covered by political risk, PVI, or standalone terrorism insurance.
For example, in 2010, nearly 100 people were killed and more than USD 1 billion in property was damaged in Bangkok during political protests against the Thai government. Although the government declared these events acts of terrorism, some insurers claimed that the demonstrations fell under the definition of political violence or strikes, riot, and civil commotion rather than terrorism.
Today, similar “grey areas” can be found elsewhere. For example, should attacks by Islamic State and other groups be classified as acts of terrorism or another form of political violence? And which policies will respond?
It is important to discuss these questions with your advisers to ensure your insurance purchases are carefully coordinated. This can help you gain confidence that you will be protected by insurance in the event that your company is affected by political violence or terrorism.
For more information on these topics, read Marsh’s 2015 Terrorism Risk Insurance Report and our political risk insurance report, Strong Capacity Drives Buyer’s Market for Political Risk Insurance.