Mapping the Gap, Part 1: War Risk Insurance

: 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.”