analysisBy Nandi Duru
Nandi Duru writes on the growing terror attacks in the country and the preparedness of the insurance industry to provide cover for terrorism risk
Two years ago, the umbrella body for insurance professionals in the country, Chartered Insurance Institute of Nigeria (CIIN), drew the attention of insurance operators and professionals to the need to evolve ways to provide insurance protection for some of the emerging risks in the country.
The President of the institute then, Mr. Wole Adetimehim, identified some of the emerging risks in the country including terrorism, spate of bombings and kidnap among others.
Aligning with his views, A.M. Best, the rating agency for the global insurance market noted that the growth of the African insurance industry that is linked to economic expansion and sustainability of economic growth would soon be weighed down by armed conflicts and terrorism among other problems.
Terrorism insurance Wikipedia defined terrorism insurance as "insurance purchased by property owners to cover the potential losses and liabilities that might occur due to terrorist activities."
The combination of uncertainty and potentially huge losses make the rating in terrorism insurance very difficult as such most insurance companies exclude terrorism from casualty and property insurance covers or at best insure it as endorsements to such covers.
A United Kingdom reinsurer, Pool-Re said it is possible to cover most types of commercial property under terrorism insurance including buildings, their contents, site property, construction projects, plant and machinery as well as business interruption losses arising from damage to such property.
Terrorism insurance does not cover property insured under marine, aviation or motor insurances as well as property on licensed nuclear sites, for which separate arrangements are in place. Its terrorism cover does not extend to private property, except residential estates owned by a property company.
There is no stand-alone policy covering terrorism only and extension of an existing policy to cover terrorism risks must cover all the property of a policyholder and not selected ones.
Demand for terrorism insurance Before the September 11, 2001 terrorist attacks on the twin towers of the World Trade Centre (WTC), insurers used to cover terrorism risks free of charge because the chance of property damage from terrorist acts was considered remote.
Thereafter, American insurers began to reassess the risk and terrorism insurance became scarce since reinsurers were no longer ready to reinsure policies in areas perceived to be vulnerable to attack. Primary insurers started filing requests with their state insurance departments for permission to exclude terrorism risks from their covers.
Last year, A.M. Best predicted that the demand for terrorism insurance would increase significantly across East Africa, linking this to the attack by al-Shabab, a terrorist group on Westgate Shopping Mall in Nairobi, Kenya which claimed over 60 lives.
However, with the increase in terrorist attacks by Boko Haram and the spate of bombings across Northern Nigeria, the demand for terrorism cover is now on the rise in the country. Many expatriates and professionals now ask for terrorism covers from their insurers while some others want terrorism extensions to existing insurances.
Constraints for insurers Terrorism risk is very difficult to insure. It is so because the odds of terrorist attacks are very difficult to predict and the potential liability enormous. The cost of the September 11, 2001 terrorist attacks on the World Trade Centre (WTC) was estimated to be US$31.70 billion.
In view of this, Adetimehin urged insurance operators tackle the problem as an industry. "For how long are we going to exclude terrorism from our insurance contracts whereas the threats are now of increasing magnitude? Major constraint in this regard has been paucity of actuarial and underwriting data," he said.
Meanwhile, insurers see terrorism risks differently from other risks because its characteristics defy all the conditions that make risks insurable. For a risk to be insurable it must be measurable in terms of frequency and severity and people or organisations exposed to the same risk must be large enough for the premiums paid by non-claimants to be able to cover losses suffered by claimants.
Also, for any risk to be insurable, associated losses must also be random in terms of the time, location and magnitude.
In addition, no one knows what the worst case scenario might be since there is little data to aid estimation of future losses and for the fact terrorist attacks are targeted at given locations or people, the people at risk are usually the ones seeking insurance and they are most likely to make claim, defying the principle of uncertainty in insurance.
How ready are Nigerian insurers? The Chairman of the Nigerian Insurers Association (NIA), Mr. Godwin Wiggle affirmed that the industry is ready to insure terrorism risks. "Most insurance companies today are beginning to buy cover for terrorism, kidnap and ransom.
So the industry is proactive in that area because there are many covers that have to do with that. Even expatriates often want their covers to be extended to terrorism, kidnap and ransom, etc" he said.
"But let us not forget that we have not got to the extent where Nigeria will be labeled a terrorist state," he stressed.
The Managing Director of Sovereign Trust Insurance Plc, Mr. Wale Onaolapo, said "any insured risk in Nigeria can be adequately handled by Nigerian underwriters especially with the solid financial base of players in Nigeria coupled with observance of international best practice."
Also, the Managing Director of Continental Reinsurance Plc, Dr. Femi Oyetunji said his firm would help insurers to acquire necessary skills and expertise to effectively cover terrorism risks. Continental-Re's main focus with regard to terrorism, kidnap and ransom is the "provision of capacity, training and specialised knowledge in terrorism," he said.
His company is committed to providing capacity to the market to enable people take necessary policies or insurances and be free to do their businesses without worrying about terrorism, kidnap and ransom, Oyetunji said.
Regulatory action NAICOM on its part is checkmating one of the things that reinforces terrorism risks, finance and following the enactment of the Money Laundering (Prohibition) Act, 2011; the Terrorism (Prevention) Act, 2011 and the issuance of the Anti Money Laundering/Combating Financing Terrorism (AML/CFT) regulations, it defined ways insurance organisation in the country could fight money laundering and terrorism financing.
It emphasised on the "Know Your Policyholder" (KYP) directive and issued guidelines on what operators should do to convince stakeholders that they are not in any way involved in the financing of terrorist activities.
The Deputy Commissioner in charge of Finance and Administration, Mr. George Onekhena, who spoke on the issue, said "in compliance with the anti-money laundering Act, we are making efforts to ensure that the operators understand what the requirements are and what steps they need to take."
Know Your Customers (KYC) is the due diligence that financial institutions and other regulated entities must observe to identify their clients and ascertain relevant information before entering into financial relationships with them. This is expected to protect companies from reputational, operational and other risks and help them to establish a reliable customers' database in-house.
Also, recommendation 15 of the Financial Action Task Force (FATF) 40+9, another measure that NAICOM uses to fight terrorism financing mandates customer due diligence, record retention, detection of unusual and suspicious transactions and the reporting obligation, etc.
Insurance organisations were also asked to appoint Compliance Officers in charge of their respective AML/CFT programmes at the management level to oversee regulator-operator interface and cooperation, customer due diligence, monitoring and responding to suspicious transactions and employee training, etc.
Global trend in terrorism insurance Concerned about limited coverage of terrorism risks in the United States of America, Congress passed the Terrorism Risk Insurance Act (TRIA), which provides a temporary programme such that in the event of major terrorist attacks, the insurance industry and federal government share losses according to a specific formula.
In the United Kingdom, government formed a mutual reinsurance pool for terrorism insurance in 1993 to take care of damages caused by terrorist activities of the Irish Republican Army. Insurers pay premiums to the pool, they pay terrorism claim and get reimbursements from the pool for losses in excess of a certain amount per event and per year.
Following the attack on WTC, the cover was extended to all risks, except wars; while government acts as the reinsurer of last resort, guaranteeing payments above the industry's retention levels.
France passed a law in 1986 saying terrorism must be covered and in 2002, established a reinsurance pool to which terrorism risks above a certain retention level is transferred. Insurers pay premiums to the pool. A terrorism pool was established in Austria in 2002 to provide reinsurance protection against property damage and business interruption up to a certain limit. Insurers issue a separate terrorism policy and then transfer the business to the pool.
Australia in 2003 created a reinsurance pool to cover property, business interruption and third-party liability losses incurred by insurers as a result of terrorist attacks.
Many other European countries at different times created government-backed terrorism reinsurance pools including Belgium, Netherland, Spain and Switzerland.
These countries made it possible for insurers to underwrite terrorism risks by paying premiums to pools set up by government and pay up to given amount of claims before government comes to the rescue.
Meanwhile, taking a cue from other countries that have succeeded in ensuring that terrorism risks are properly insured in their economies and in recognition of the realities of Boko Haram and insurgency in country, the Nigerian government should set up a terrorism pool to which all insurers in the country would subscribe and pay premium too.
Claims arising from terrorist attacks beyond an agreed level should be borne by government in its capacity as the reinsurer of last resort, having guaranteed payment of claims above certain limits. This is the only way Nigerian insurers could effectively underwrite terrorism risks.