For Australian companies, overseas business is big business.
The level of Australian investment overseas has more than doubled in the past decade to almost $500 billion last year and more and more of this money is flowing into unstable regions.
In fact, the proportion of global nominal output generated by countries with medium to high political and security risk also doubling in the past 10 years, according to data from global risk consultancy Control Risks.
This has brought ever-growing exposures to risks such as riots, civil war and kidnapping. To counter these risks, businesses turn to policies such as political violence and terrorism (PVT) and kidnap, ransom and extortion (KRE).
The hot spots
Whether it be war, acts of terrorism, protests, or a kidnapping, political and security risks are inherently unpredictable, as recent events in Hong Kong and Ukraine have shown. “It is very much a moving target on a week-to-week basis depending on what is happening around the world,” says Michael Lincoln, National Underwriting Manager for Crisis Management Solutions at Liberty International Underwriters.
Ongoing war, insurrection, revolution and civil-unrest across the Middle East and North Africa continue to pose a significant risk to foreign companies operating in the region. Terrorist organisations such as the Islamic State of Iraq and al-Sham, al-Qaeda in the Islamic Maghreb, al-Qaeda in the Arabian Peninsula, and al-Shabaab not only pose a high risk of political violence, but also a high risk of kidnapping, especially in places such as Algeria, Yemen, Syria and Iraq.
Kidnapping has long been a significant risk faced by companies operating in volatile locations, but getting accurate statistics is difficult. “There have been so many kidnappings in East Asia, for example, that have not been reported in the public domain. Some of them aren’t even reported to police,” says Neil Fergus, Chief Executive of security consultant firm Intelligent Risks.
Of the cases that are reported, Nigeria and West Africa in general have emerged as a global hotspot, while Latin America’s share of cases has dropped markedly over the past five to 10 years, according to figures from Control Risks. “Certainly in terms of traditional kidnap exposure, Nigeria would be the number one place for us, and that has particular relevance to Australian oil and gas companies working there,” says Dan Collinson, Australasia K&R Manager for AIG.
The Gulf of Guinea has also overtaken the waters off Somalia as a global hotspot for piracy and hijackings, according to statistics from the International Maritime Bureau Piracy Reporting Centre.
In the Asia/Pacific region there is some exposure to kidnapping risk in the southern Philippines in areas controlled by the Abu Sayyaf terrorist group, as well as in Papua New Guinea and West Papua. “There’s some exposure in Asia-Pacific, but it’s not as severe as in, for example, Afghanistan and Nigeria and other parts of the world,” Lincoln says.
Eye to the world
In response to such risks, insurers say more Australian companies are looking at political violence and terrorism polices to insure their international operations. “We’ve certainly had a big increase over the past six months of people inquiring about PVT coverage,” says Richard Cook, head of Marsh’s Political Risk practice.
There hasn’t been as much interest in cover for kidnap, ransom and extortion, but the market penetration of KRE policies is up compared to five or 10 years ago. “Traditionally we would say 70 to 80% of the ASX large multinationals already buy KRE,” AIG’s Dan Collinson says. “Where we are now seeing interest is in that level below; smaller companies are starting to purchase it as their operations expand overseas.” This kind of interest is leading to policies with more affordable premiums. “We would sell a policy to a small organisation that is not necessarily travelling to one of the major hotspots for maybe $2000, and that would include coverage of probably $1 million.”
Broad coverage, few exclusions
A traditional KRE policy covers four main perils; kidnap for ransom, detention, hijack, and extortion. Under a typical policy, cover will automatically extend to spouses, families, guests, and those involved in business with the insured. “Certainly it is quite often family or guests who tend to be the victims,” Collinson says. “They have far more predictable routines and tend not to have the same level of security training.” Extensions to a basic policy are also available for additional coverage for risks such as disappearance, threat response, and political evacuation. Extortion coverage under most policies now also includes cyber attacks.
PVT policies typically cover for property loss or damage and resulting business interruption for everything from riots, strikes and civil commotions, to terrorism, sabotage, war, civil war, revolution, coup d’état and insurrection. More perils are included along the political violence spectrum from specialist terrorism cover towards a more comprehensive political violence policy. Nuclear, biological and chemical attacks are excluded, as they are right across the property class.
Because such policies can cover such a broad range of events, each is typically tailored to the insured’s specific situation. “They will be very dependent on what the risk yield of an asset is, where it is located, what the security arrangements are. It’s pretty difficult to have a carte blanche, off-the-shelf type product,” Marsh’s Richard Cook says.
While the events these types of policies cover may seem like an outside bet, Cook says that for those going into emerging or developing economies they provide protection from risks most will have no experience in predicting or handling. “They are quite often completely different to what they face in Australia, where the main risk may be fire or a motor vehicle accident,” he says. “In these territories, the main risk could be civil war or terrorism.”
In the case of a kidnapping or extortion, the immediate expert assistance provided
by crisis management firms can make all the difference, Marsh’s Income and Corporate Protection National Manager Michael Beveridge says. “This is not a take-over or acquisition, this isn’t getting another loan; it’s something completely foreign to most boards.”