: Prelude :
Corporations involved in major international projects often borrow hundreds of millions, even billions of dollars to fund their schemes. It is only natural that they purchase several types of insurance to protect their liabilities. One premium is war risk insurance. Most such policies cover damage or loss resulting from bombings, civil unrest, expropriation, terrorist attacks, derelict bombs and torpedos, and much more.
War risk insurance policies always list exceptions. Some of these are outlandish—the policies do not cover damage resulting from hostile nuclear explosions. But a more relevant clause is the list of regional exceptions. There are plenty of locations where the insurance simply does not provide coverage, no matter what happens.
I recently had the chance to review several policies from some major war risk insurance providers. Not surprisingly, the regional exceptions were very similar, but most policies annually updated the list. The usual suspects are shown in light red. Countries colored bright red—Bolivia, Sri Lanka, and “Indonesian Ports”—were added in the past two years on several policies (“Indian ports north of 18 degrees North, West of 72 degrees East” also appeared on one policy). But there is also cause for hope: regions colored green are those removed from some policies in recent years, including Angola, Serbia, Libya, and Colombia.
Including the regional exceptions on a basket of war risk insurance policies gives us another angle on the gap, and can get us thinking on where it is improving and where it is getting worse. And the usual suspects are akin to what Dr. Barnett sometimes calls the worst parts of the gap: “security sinkholes.”
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COMMENTS / 15 COMMENTS
ComingAnarchy.com » Blog Archive » Mapping the Gap, Part 2: Homosexuality Laws added these pithy words on Mar 08 06 at 10:27 am[...] Mapping the Gap, PreludeMapping the Gap, Part 1: War Risk InsuranceMapping prejudiceWhy is Sarkozy to blame?The Many Flavors of the Social Welfare State [...]
The Glittering Eye » Blog Archive » The Council has spoken! added these pithy words on Mar 10 06 at 2:03 pm[...] The Watcher’s Council has announced its picks for the most outstanding posts of the preceding week. This week the selection for the winning Council post was Gates of Vienna’s post, “The Bloody Borders Project”Â?. In this post Dymphna inaugurates their “Bloody Borders Project”Â?. It’s a serious endeavor that bears watching. Take a look at the map there that maps the incidence of Islamist terrorism since 9/11. It bears reflection. Compare this map to Thomas Barnett’s Core and Gap. See also the maps at Coming Anarchy of war risk insurance and anti-homosexuality laws. The second place post was my own post on the prospects for world government, “From Way Up Here”Â?. [...]
ComingAnarchy.com » Blog Archive » Mapping the Gap IV: Canada, Germany, UK added these pithy words on May 02 06 at 4:09 pm[...] [Prelude | Part 1 | Part 2 | Part 3] [...]
Riskape » Blog Archive » War Risk Insurance added these pithy words on Aug 08 06 at 4:10 pm[...] With the Middle East situation in the headlines and while we’re doing maps, here is one of the Tom Barnett’s famous Core/Gap Map overlain with regions that commonly draw a war risk premium from insurance companies (hat tip: (Coming Anarchy). [...]
StrategyUnit added these pithy words on 07 Mar 06 at 6:03 amCurzon, honestly guys, how do you get and make all these great maps?
Curzon added these pithy words on 07 Mar 06 at 6:11 amI use Macromedia Fireworks to make my graphics—but this one is nothing real special. I take most maps from NASA World Wind; in this case, I snatched the file from a search on images.google.com.
Please note that the resident genius in this deparment is our grandmaster web designer, Sir Francis Younghusband.
Tiu Fu Fong added these pithy words on 07 Mar 06 at 6:26 amI’ve seen nuclear attack risk covered on insurance policies for investments in South Korea. Drives the premium up as some actuary tallies up the risk/reward calculus.
Elizabeth added these pithy words on 07 Mar 06 at 7:12 amGreat map! I find it comforting that Iran has not been added to the red area yet- does this mean there may be a peaceful solution?
Curzon added these pithy words on 07 Mar 06 at 9:01 amTFF: I’ve seen some policies only list “hostile” nuclear bombings, which makes you think the policy will cover accidental or test atomic explosions…
Some War Risk policies also include a cancellation clause called “Five Powers War Exclusion”:
Upon the outbreak of war (whether there be a declaration of war or not) between any of the following: United States of America, United Kingdom, France, the Russian Federation, the People’s Republic of China, this insurance will terminate immediately.I think that’s otherwise known as the, “We’re all fu**ed!” clause.
IJ added these pithy words on 07 Mar 06 at 10:04 amNational politics will surely remain a major risk (insurable?) to the global market until the UN agrees enforceable norms for the behaviour of sovereign governments. The trend at present is in the direction of more central control, with the new UN Peacekeeping Commission and a commitment to protect nationals (R2P) – Darfur will be a test of the UN members’ resolve.
IJ added these pithy words on 07 Mar 06 at 3:53 pm*until the UN agrees enforceable norms for the behaviour of sovereign governments*
How long should we wait? Today’s news (courtesy of Sudanwatch) is that UN members are even refusing NATO a mandate to intervene in “Sudan’s strife-torn Darfur province”.
Joe added these pithy words on 07 Mar 06 at 5:40 pmThis is an interesting topic, but mapping the common exceptions seems like a backwards way to find the sinkholes of the Gap. After all, what’s happening here is that someone in Insurance Company X makes a list of countries that are either in a state of war or extremely likely to enter a state of war in the near future, this list finds its way into a war risk insurance contract, and your honourable lordship plots the list on a map.
Why not just map the conflict zones directly? i.e., “if people are reportedly being massacred on a regular basis, color it red.” This seems to be based on more-or-less conventional wisdom anyway.
I’m guessing the recent Colombia-Bolivia switch is because the US is refocusing its counterdrug efforts. Seriously, when will they stop wasting their time farting around in the Andes?
Tiu Fu Fong added these pithy words on 08 Mar 06 at 1:42 amOn the topic of business approach to “we’re all f*cked” risk – I work largely in equity capital markets and corporate finance, not insurance, so can’t speak for how insurers approach exclusions. However, in ECM deals, when we draft “sh*t hits the fan” termination events for terrorism, war, natural disaster, epidemic (epidemic being a more common post-SARS) etc, choice of nations largely comes down to the two major global financial centres/nexuses (UK & US), main regional financial nexuses/centres reflecting the location of the investor base or other deal-specific risks (eg in Asia – Singapore and HK) and then a list generated from a 30 second brainstorm on countries relevant to the deal (eg where the assets are located, where major businesses and customers are located). Then we’ll occasionally toss in North Korea (because they are crazy and potentially could attack anyone in the region) if it’s on our minds because Coming Anarchy or some other blog ran a piece on NK recently. To my knowledge, most ECM banks take a similar approach and don’t have a centralised list.
The ECM approach reflects the much shorter risk period for ECM deals vs insurance contracts (eg in Asia – anywhere between 3 – 15 days depending on settlement periods and local law requirements on pre-funding, vs multiple years for insurance contracts). On corporate finance contracts (eg buying an asset with anywhere between 3-6 months from execution of contracts to date on which assets and cash are exchanged), the approach is much the same as the ECM approach.
Additional protection comes from other termination events (eg material adverse effect on the business, failure to meet forecasts).
