Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Riots could turn 2020 into a capital event. PCS designates riots as a catastrophe


The ongoing situation of riots and civil commotion outbreaks in numerous cities across the United States have the potential to aggregate into a reasonably sizeable loss for insurance and reinsurance carriers, which analysts at KBW warns could turn 2020 into a capital event for some.

riot-lossesOver the last few days and nights riots have struck the heart of many U.S. cities, including the Capitol area, with fires being set, significant damage to businesses and properties and cases of looting being widely seen.

Update, Jun 3rd: The riots have now been designated as a catastrophe in more than 20 U.S. states by PCS.

The rioting has been triggered by the death of George Floyd while in police custody in Minneapolis. While the police officers responsible have been arrested, largely peaceful protests have broken out across the country and in some pockets violence has broken out and damage to property been caused.

It’s too early for any estimates of potential economic costs of the damage from the rioting across now more than 25 different cities and locations in the U.S., so no estimates yet for the potential impacts for the insurance and reinsurance industry.

But it’s seen as likely that this could become the most expensive outbreak of rioting in United States history, as the now six nights of civil disturbance has affected such a wide area.

The most expensive outbreak of rioting in insurance claims terms was previously the Los Angeles riots of 1992, which cost around $750 million at the time, according to the Insurance Information Institute. In 2020 dollar terms that would have been a roughly $1.42 billion insurance market loss.

Those riots only affected a single city, so the fact the rioting in recent days has affected more than 25 cities and locations suggests the aggregated costs could already be reaching those levels.

As our sister site Reinsurance News reported earlier today, the U.S. riots could present a relatively meaningful man-made loss event for the insurance sector.

A recent example of a costly strike, riot, and civil commotion (SRCC) industry loss event was the riots in Chile, which have driven retailer specific property losses of close to $1 billion, as well as other claims costs.

Analysts at KBW said that, “In general, personal and commercial property insurance policies (including auto physical damage) will cover damage caused by recent riots.

“Our best guess (we haven’t yet seen any credible loss estimates) is that insured damages will be relatively modest, but the cumulative impact of pandemic-related underwriting losses, difficult weather YTD, and potentially above-average hurricane losses could turn 2020 into a capital event for some (re)insurers.”

KBW isn’t concerned about any one event so far this year, in terms of how it will affect re/insurers. Even the Covid-19 pandemic is highlighted as being believed to “only constitute an earnings event for most (re)insurers.”

However, it is the potential cumulative impacts of the pandemic, severe weather already suffered this year, the forecasted to be active hurricane season and now the chance of losses due to these riots, that concern the analysts.

“Our concern is that the cumulative impact… could aggregate into a capital event for some (re)insurers,” the analysts said.

The riots could also be another catalyst to further harden rates, the analysts from KBW said, should the eventual costs to the insurance and reinsurance sector be relatively significant.

The rioting also raises the prospect of some business and commercial property owners being able to claim on business interruption, where perhaps they haven’t been able to for the Covid-19 pandemic due to exclusions and other wording factors.

This could draw more claims than would normally be seen, as businesses hit by the pandemic lockdown look to any chance of recouping some of their losses through a business interruption claim related to rioting.

Losses caused by strike, riot, and civil commotion (SRCC) can often be covered by retrocession and there have even been industry loss warranty’s (ILW) exposed to such events in the past.

The ultimate extent of the financial impact from the ongoing U.S. riots will drive how far down the market any losses flow and whether they are considered multiple events, or a single outbreak, could also define how any losses flow to reinsurance and retro capital sources, if the losses rise high enough to do so.

We spoke with Tom Johansmeyer, head of PCS, to gain a greater insight into the potential for the rioting to drive industry losses of any meaningful level.

He began by telling us that PCS has designated the rioting as a catastrophe event and so will track them and report on insured losses.

Johansmeyer explained, “The riots in the Minneapolis area are the first riot and civil disorder event designated by PCS since the Baltimore riots of 2015. And as we monitor for insured losses outside Minnesota, the event shows potential to become the first PCS riot and civil disorder event to include more than one state.

“Historically, riot catastrophes in the United States have had relatively low insured losses industry-wide. Of the twelve PCS has designated since 1965 (not including the event in Minneapolis), the total insured loss falls just shy of US$1 billion, the overwhelming majority of that from the Los Angeles riots of 1992. Almost half had insured losses of below US$10 million. However, there are reasons to remain cautious with the riots we’re currently seeing, even if there is only one historical event with several hundred million dollars in insured losses.

“To better understand some of the risks involved with the current riot, it may make sense to look to last year’s event in Chile, where insured losses exceeded US$2 billion industry-wide. At least a third of the industry loss, as we’ve estimated so far, comes from a handful of large retailers’ property programs. In fact, approximately 20 percent of the insured loss comes from one retailer. Losses to large programs could have a disproportionate impact on the insured losses from a catastrophe event, resulting in surprisingly large totals. When you look at the United States, riot and civil disorder may generally look like a sub-US$100 million risk, although with the potential for much greater losses. But, when you add a handful of large national or international companies with losses of more than US$100 million each, you could see a much larger industry loss begin to materialize. The large losses within the catastrophe could change the character of the overall event.

“There was a similar dynamic in the political violence loss in Turkey in 2016. It was one of the largest insured losses since at least 1999, according to PCS Turkey data, in large part because of some large energy account losses included in the event.

“So far, the fact that Target closed approximately 9 percent of its stores, across 13 states, shows the potential for large property risk programs to contribute to the catastrophe. And that’s where it makes sense to look at the losses sustained by Falabella, Wal-Mart, and others in Chile last year. Of course, Target is based in Minnesota and may have a higher concentration of stores there. So, at a minimum, it might make sense to look at the other cities affected, see which retailers are named in news reports, and get a sense of their concentrations in the cities that have been reported as affected by the riots over the weekend.

“I was in touch with a number of clients over the weekend, and one of the most significant challenges that they kept raising was event definition for reinsurance. It seems that contiguous states – or even contiguous counties – may be required for riots in several places to be considered one event. If the riots in cities outside Minnesota caused sufficient physical damage to warrant catastrophe extension by PCS, then there could be coverage mismatches within the global reinsurance market. The notion that geographical contiguity is required for riot does seem a bit dated. Global 24/7 broadcast and online news enable the rapid transmission of both information and sentiment rapidly, where in the past, fervour may have subsided as word of mouth was the fastest way for the latest updates to move from one village to the next.”

Artemis Live - ILS and reinsurance video interviews and podcastView all of our Artemis Live video interviews and subscribe to our podcast.

All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance video content and video interviews can be accessed online.

Our Artemis Live podcast can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.