Civil unrest severely impacts more countries globally than any other type of political violence, even terrorism. Charlotte Ingham, principal political risk analyst at Verisk Maplecroft, outlines how insurers can better understand the risks involved.

Too often, when assessing the risks of civil unrest, insurance companies consider only past events. However, these alone are not a definitive predictor of incidents of public protest.

In order to avoid unexpected losses, insurers need to take a holistic approach to assessing the risks. In other words, they should not only look at actual incidents of civil unrest. They must also assess the underlying causes of that unrest, in the knowledge that it is often the collision of different factors at one point in time that can drive the public onto the streets. Insurers must also consider whether a country’s population has the right channels for expressing its grievances before these get to the point of explosion.


Assessing the triggers

Insurers providing coverage in the G20 countries – which include many of the most developed insurance markets – must deal with an increasingly complex set of risks in relation to political violence. This is particularly the case with civil unrest.

Several G20 countries – including India, Mexico, South Africa, France and Brazil – have experienced sizeable protests on a weekly basis over the last 12 months. This type of civil unrest can trigger both physical damage and business interruption policies, so it is vital that insurers understand the risks.

Evaluating the severity and frequency of public unrest is, of course, the standard first step in both determining pricing and setting accumulation limits. However, while previous incidents do provide a strong indication as to whether continued disorder or instability is likely, they cannot capture the potential for the emergence of unrest in the first place. Therefore, in order for insurers to address this limitation and identify countries with an increased risk profile, it is essential that they assess the volatile mix
of structural factors that may drive future unrest.

The state of a country’s economy is a critical bellwether for the likelihood of civil unrest. Factors such as inflation, unemployment, the cost of living and the removal of food or fuel subsidies are key sources of discontent that increase the potential for mass demonstrations or violence.

For example, the implications of the UK’s vote to leave the EU increase the potential for unrest in the country. Inflation is expected to surge owing to the fall in the value of sterling and a loosening of monetary policy, while the impact on the job market is already visible. If the predicted economic slump combines with rising social pressures and tensions over immigration, there is potential for increased civil unrest.

Insurers looking to see where flashpoints may occur can also look to social factors such as perceived or actual discrimination against ethnic or religious groups. In certain circumstances, the catalysts for these types of protest are often one-off events, but they will only materialise where underlying factors are simmering beneath the surface.
In the US in July, we’ve seen the Black Lives Matter movement act as the driving force behind demonstrations in some states following separate incidents in which two African-American men were shot by the police in Louisiana and Minnesota. In their current form, these protests are unlikely to materially affect insurers, as physical damage to business appears to be limited, however, disorder can intensify rapidly, as Baltimore witnessed with the riots of 2015.

Latent economic and social tensions can also be inflamed by corruption at either the state or corporate level. Using data to evaluate these conditions can provide insurers with a means to understand the baseline risk of unrest. Instances of corruption acting as the spark for protest are too numerous to list; however, it is worth noting that, most recently, Brazil’s Lava Jato bribery probe brought the public out into the streets in their millions, causing major disruption to business in the country’s major cities. Contingency policies covering the Rio de Janeiro Olympics could potentially be triggered by similar unrest.


Relieving the pressure

All countries will, at one point or another, be subject to economic, political or social pressures – either domestic or international – that have the potential to unleash public discontent. But what dictates whether or not that potential for protest will evolve into actual disorder, and how serious the unrest might be? The key determinant is whether or not the country has effective mechanisms to alleviate public discontent before it gets to that stage. These enable people to express and even resolve their grievances via civil society groups, such as trade unions, religious or social groups and grassroots political movements, thus reducing the likelihood that they will have recourse to more disruptive methods.

It is striking that none of the G20 countries in Verisk Maplecroft’s Civil Unrest Index 2016 (Q3) that have witnessed substantial disorder in the last year – India, Mexico, South Africa, France and Brazil – have adequate structures in place to avoid grievances escalating into wholesale protests.

While France has an active civil society and trade unions, these actors tend to encourage demonstrations, as protest and industrial action are key facets of the country’s political culture. In contrast, Germany’s more consensual political culture supports close co-operation between trade unions, industry and government, so public protest is less likely to be considered as an option of first resort in the event of labour disputes.

So, the job of insurers is a challenging one, at a time when many of the G20 are at risk from civil unrest. In order to provide much-needed financial protection for companies, the insurance industry needs to look beyond the history of unrest in a country to the bigger picture. And that picture often involves putting together the pieces of a jigsaw in the right combination – as looking at one potential trigger factor on its own is generally not enough to judge whether discontent will develop into something more.

Empowered with this understanding, insurers will be better positioned to differentiate risks supporting both the underwriting and exposure management processes.