Markets & Finance

High prices slow down terror insurance

westgate

A contractor clears debris from a section of the Westgate Shopping Mall in Nairobi following the September 2013 terrorist attack. Photo/FILE

A recent decline in Kenya’s security rating has pushed up the cost of terrorism insurance, forcing some policy holders to drop it altogether despite rising risk of exposure, industry data shows.
UAP insurance, one of the leading insurers of terrorism-related risks, said the number of policy holders dropped 16 per cent in the first five months of the year following a seven per cent rise in premiums.

The pricing of terrorism risk has traditionally been influenced by the country rating making Kenya’s severe and frequent attacks a critical factor.

UAP general manager of operations Michael Oduor said the pricing of terrorism risk has increased almost two-fold in the past 18 months.

“Convincing clients to buy or renew policies at the current prices has become a major challenge for insurers,” said Mr Oduor, adding that the firm had lost some policy holders despite the rise in terrorism incidents.
The uptake of terrorism insurance picked up following last September’s attack on Westgate Mall, making the ongoing decline a complete reversal.

The rise in premiums has, however, become a growth driver for reinsurers like the African Trade Insurance Agency (ATI) which reported higher gross premiums driven by political violence, terrorism and sabotage covers.

The company’s gross premiums rose by 47 per cent last year compared to a year earlier.

More recently, industry players have been running media campaigns for the terrorism product that is little known despite of having been introduced in the market in 1998.

READ: Westgate attack to raise cost of terror insurance

Tom Gichuhi, the managing director of the insurers’ umbrella body, AKI, said the association wanted to create more awareness of the cover following painful incidents that have seen businesses miss compensation for terror-related losses because their insurance policies did not include terrorism.

Most victims of the Westgate attack were not compensated because their policies did not include protection against terror attacks.

The new risk profile has also hit motor vehicle owners who have long regarded comprehensive insurance policy as sufficient for all forms of risks.

But the insurers disapproved of that position when they declined to pay for cars that were destroyed during the Westgate attack.

The insurers argued that the comprehensive cover relates to damages incurred during normal usage of the car and does not include extraneous acts such as terrorism.

Acts of terror and natural disasters unless specified in the contract fall under force de majeure (beyond normal) upon which underwriters recant responsibility.

Insurers tried to have owners of matatus, which have been targeted by terrorists, pick up terrorism cover with only limited success.

Matatu owners said managing the increased costs that come with such products is the reason the response has been slow.

“We believe the terrorism risk is a passing cloud. They [insurers] can be very expensive and when you add costs you have to transfer it to the users,” said Simon Kimutai, who chairs the Matatu Owners Association.

The terrorism cover is priced at 0.25 per cent of the value of the car and attracts a minimum payment of Sh2,000. That means only cars valued above Sh800,000 would pay more than the minimum.

Mr Oduor said the industry has not accumulated enough portfolio in terms of numbers and value insured to influence any changes in pricing.

Hotel and shopping mall operators are among business owners who have been forced to buy terrorism cover following recent attacks in similar premises.

“Some of the owners took terrorism cover after 2008 but that increased with the Westgate attack,” said Knight Frank managing director Ben Woodhams.

Insurance companies are now asking the government to step in and support the industry given the unpredictable nature of the risk and its scale.

“This is because it is the duty of the government to protect citizens and their properties from terrorists,” Kenneth Oballa, the training manager at Zep Re, says in a published paper.

Britain, the US, Israel, Northern Ireland and South Africa are examples of governments that compensate their citizens for terrorism-related losses.

Nairobi and the coastal city of Mombasa have come under sustained terrorist attacks since the beginning of the year, leading to loss of human lives and property.

The attacks have also had heavy economic impact arising from damage to the tourism industry that has been hit by advisories issued by foreign countries against travel to Kenya.

Mr Gichuhi also said that the government needed to subsidise the risk as the terrorists only target civilians to hurt the government.

“We should establish a terrorism pool subsidised by the government so that insurers can take in more of the risk,” he said.

In the US, each insurer has a deductible 20 per cent of earned premiums directed to a common pool. In case that pool is breached, the insurers can recover 85 per cent of their losses from the government.

Losses from the September 2001 terror attacks in the US were estimated at Sh2.7 trillion ($32 billion).

Kenya is estimated to have lost Sh10 billion in the Westgate attack out of which Sh4 billion was related to businesses hosted in the mall.

READ: Westgate attack to cost insurers over Sh10bn in claims

The Kenyan government has so far settled medical expenses of the victims of the attack but has so far done little to financially support businesses for losses incurred.

Mr Oballa acknowledged the difficulty the industry was facing setting premiums for terrorism risks, citing the fact that unlike natural disasters whose risk element can be assessed based on historical happenings, acts of terror remain hugely unpredictable.

“This combination of uncertainty and potentially huge losses makes the setting of premiums a difficult matter,” he said.

Higher terrorism alerts have forced businesses to spend on security, significantly increasing operational costs.

Besides the extra insurance costs, investors have hired security firms to man their premises while public transport companies have had to buy detectors to search commuters boarding buses.