Political risk has been covered by insurers since the beginning of Lloyd’s: ships were travelling all over the world, which raised concerns about piracy, mutiny, war and other perils. Today, there are many ways in which to insure political risks, but people often only think about them once the damage has already been done. Insurers and reinsurers need to have a comprehensive understanding of the political situation to be able to offer their clients the right solutions.

 

The world today is facing considerable political uncertainty. According to the “Fragile States Index” created by the US think-tank Fund for Peace, half of the countries in the world are classified as weak, failing or failed. For a state to be legitimate, the provision of core services, such as access to drinkable water, proper sanitation and security, is absolutely crucial. People will not remain loyal to a state that does not guarantee these basic services. The other condition for legitimacy is that all aspects of society are represented in the government.

 

When a state fails, the situation can deteriorate quickly. “We have this lifecycle, says Kade Spears, Head of Specialty at The Channel Syndicate, the state cannot provide the core services, there is no legitimacy in the government, people endure what they can, and they can organize to make their voice heard, but eventually they choose to exit the country or decide to rebel, you have the creation of these non-state actors, and it leads to regular conflicts. And when these groups are formed, it takes a very long time for the conditions to change”.