x Abu Dhabi, UAEMonday 22 January 2018

Arab Spring drives up premiums

Unrest in the Middle East is prompting a wave of interest in insurance cover against war, terrorism and other events.

Thousands of Egyptians took to the streets across the country over the weekend to defend the uprising that toppled president Hosni Mubarak. AFP
Thousands of Egyptians took to the streets across the country over the weekend to defend the uprising that toppled president Hosni Mubarak. AFP

Increased unrest in the Middle East is creating surging demand for political risk insurance. As a consequence companies face higher premiums to protect their business.

Libyan companies have already incurred losses running to several billions of dollars because of insufficient cover against the fallout from the civil war, say brokers.

"When it comes to political risk insurance it will go up," said Mounir Kabban, the president of United Insurance Brokers, one of the largest Middle East specialist brokers. "Underwriters will require a substantial premium."

Traditionally, many companies have chosen not to insure against political risk, deeming it too much of a rarity to warrant cover. This type of insurance covers such contingencies as the impact to business from political violence, and the inability to repatriate funds because of global sanctions.

The Arab Spring is changing perceptions of risks, say brokers.

From enforced shutdowns caused by strikes to physical damage inflicted by armed conflict, many businesses in the region have experienced disruption caused by unrest this year.

Some regional trade flows have also been hampered by the instability.

Demand has already been high for war and terrorism insurance launched in the Middle East by Liberty International Underwriters, according to the firm, which has a regional office in the Dubai International Financial Centre.

"We began to discuss opportunities to develop the initiative in August 2010. Since then, political and regulatory events have meant that demand has surged," said Michael Burle, the class underwriter at Liberty Syndicates, the managing agent based in London for the service.

Hotels, restaurants, industrial units and onshore energy-related facilities can apply for cover.

Growing interest in more robust insurance coincides with some banks requiring companies to have war and terrorism cover in place before they offer finance, according to brokers.

The surge in interest will help to push up premiums, say analysts. "Premiums will rise," said Marcus Barnard, an insurance analyst at Oriel Securities in London. "With something like a flood or storm damage these tend to be events that happen infrequently and affect a relatively small group of people. But this [the Middle East unrest] is widespread losses over a long period, meaning premiums will just reflect the expected losses."

Companies without political risk cover operating in Libya are already facing financial pain caused by damage from the civil war.

Conventional insurance cover often includes clauses excluding business interruption caused by war and terrorism. Fixed assets such as buildings are often not protected from such acts, although limited cover is available for marine operations and cargo.

Multinational oil majors and state-owned oil and steel companies were among those facing a bill of several billion dollars already, said Mr Kabban, referring to events in Libya.

"There are major losses in Misrata in the south where steel factories were built in the mid-1970s at a cost of US$5 billion (Dh18.36bn) and it will cost at least $8bn to rebuild," he said. "Nobody has put claims in as no loss adjuster will consider this."

Libyan oil trade has ground to a virtual halt as production remains stalled and banks decline to clear payments in US dollars because of global sanctions against the North African country.

Mr Kabban said his company, based in London, was having to reject requests for cover from Libyan oil firms and others because of the sanctions blocking transfers of payments in dollars.