Ethiopian Business Review

Print this page

Terrorism and Political Violence

Opportunity, Threat for Insurance?

No country in the world, however well protected, can consider itself immune from political violence. Terrorism is evolving fast as networks and cells continue to look at new methods to inflict damage and cause panic. Under the current circumstances, politically motivated attacks and civil unrest in Ethiopia keep threatening business organizations. As a result, companies look to insurance protection—primarily political risk and terrorism coverage—to manage the exposure. The current eruption of political violence in parts of Ethiopia and the adverse human and financial cost, coupled with the swelling tendency of threats, is pushing the risk into uncharted territory. 

 

Curiosity in political violence and terrorism insurance in the country has risen beyond expectation due to the damages caused by the public unrest. But with this chaos, comes an opportunity for insurance companies operating in the country: a chance to augment insurance coverage. To benefit from the presented demand, Ethiopian insurers ought to come up with new insurance products.

Political violence and terrorism insurance policies started to receive acceptance following terrorist attacks in several countries. For instance, in Kenya, after the bloody election of 2007, the violence left behind a trail of damage and theft of assets through looting, injury, and death to over a thousand citizens. According to Association of Kenyan Insurers (AKI), Kenyan insurers were ill equipped to provide compensation to the victims, purely because they had not provided these people and others with the requisite insurance covers. It was therefore, a wakeup call for the insurance companies.

That’s how a number of insurance providers crafted insurance policies to cover terrorism and political risks in 2009. To save members from the expensive reinsurance covers, AKI conceptualized the need for a Political and Terrorism Market Pool.

It is well remembered that although lifted currently, Ethiopia declared a state of emergency in October 2017 that was meant to last six months but ended up lasting longer. During this time, there were attacks on properties of Selam Bus; an attack on a cement factory owned by Nigerian business tycoon Aliko Dangote, just to name a few. 

Terrorism and political violence insurance covers the insured against property loss or damage, as well as business interruption costs. In its widest form, it provides cover for potential losses arising out of terrorism, sabotage, riots, strikes and civil commotion and malicious damage, insurrection, revolution and coup d’etat, war and civil war, employee and general terrorism liability, Chemical, Biological, Radiological & Nuclear (CBRN) and active assailant. Traditionally, it is considered to be a difficult product to sell for insurance companies, as the odds of terrorist attacks or political violence are very difficult to predict and the potential liability enormous. However, in its pragmatic sense, the damage to property and loss of life following political violence or terrorism means an opportunity for insurers. If considered properly, following an attack, business organizations without insurance would find it difficult to recover. This creates fertile ground to promote such coverage. 

Coming across such huge claims, one might think that insurance companies would panic, but this is not so. The insurers see the loss of property and damages among some of their clients as an opportunity to bring on board other companies who haven’t bought their policies. Such companies would do anything to avoid the risk of becoming like their uninsured counterparts. If supplemented by the right mix of promotion, training, and other marketing tools, the fear factor would enable insurers to sell terrorism and political violence insurance products.

The prime objective and defining attribute of insurance is indemnity, providing that a loss payment will replace what is lost, putting the insured back on track. That’s the raison d’être for having insurance. Responding positively to the needs of businesses through availing the required insurance products help customers gain confidence that the insurance industry is functioning to safeguard their existence.

The main challenge with political violence insurance is determining whether an occurrence is caused by terrorists or not. In more extreme cases the issue can be downplayed by governments who favor denying the existence of terrorists or political violence in their country.

On the other hand, some observers believe that political violence and terrorism exposure is beyond the insurance industry’s capacity to satisfactorily underwrite the risk. Political violence attacks have the possibility to be colossal and wide-ranging as a result of the interrelated nature of the risk, which in turn makes it difficult for insurers to assess the frequency and establish severity. Experts working in insurance companies advise that the extent of the exposures is too wide to be borne by the private sector alone; and recommend that government covers the risk through arranging terrorism risk insurance pools.

Terrorism and wider political violence policies are designed to fill the gaps left behind by exclusions in property policies. Some notable industry experts argue that such trends in providing cover for perils that fall under general exclusions section of conventional insurance policies such as war, political violence, and sabotage threaten the very existence of insurance. Others propose introducing coverage to guarantee sustainable growth and handle risk. 

Some insurers around the world are issuing an increasing number of political violence insurance policies. However, skill and knowledge gaps, and inexperience in underwriting and pricing this rapidly evolving risk, are hampering its acceptance. It is known that despite the registered increase in gross written premium, the penetration and density of insurance in Ethiopia has remained low. Facts and figures show that identical conventional products, low levels of public awareness, price based competition, urban centered service, lack of innovation and scarce qualified man power are said to be the major culprits for the dismal performance of the Ethiopian insurance industry. As a result, insurers in Ethiopia are facing unprecedented criticisms from customers owing to their unresponsiveness to the changing needs of customers. Customers are demanding not just adaptation, but structural transformation on the industry’s murky landscape.

To benefit from the presented demand, I believe Ethiopian insurers ought to come up with new insurance products. I expect the next few years will bring more change to the Ethiopian insurance industry’s response to rising customer expectations. Having insurance cover for terrorism and political violence in Ethiopia may assist to reassure investors and business owners and ultimately, draw more economic stakeholders to Africa’s growing economy. Accordingly, The Association of Ethiopian Insurers or the state reinsurance company or the regulator should work on establishing the terrorism, political violence insurance market pool at national level. Launching the product could be of strategic interest to insurers but before stating down the long journey of implementation, insurers need to fulfill the necessary infrastructures, and build their underwriting skill and capacity to understand risk, in order to save the insurance products from dying at early stage.


6th Year . January 16  - February 15 2018 . No.57


 

 

Fikru Tsegaye

Fikru Tsegaye holds MBA in Marketing and MA in Human Resource and Organizational Dev’t. He is currently working at Ethiopian Insurance Corporation as Marketing and Strategic Management Team Leader. He can be reached at fikru.tsegaye@yahoo.com