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War Risk Insurance

War Risk InsuranceAs the business landscape becomes more globalized and complex, new types of insurance are initiated to provide for the growing needs of business owners and investors. War risk insurance is one such product, representing an emerging era of global asset protection.

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This kind of insurance is meant to defray losses associated with war — a political risk that was once considered too extraordinary to warrant protection by any outside underwriter. Now, war risk insurance is considered part and parcel with political risk considerations.

Who Uses War Risk Insurance

War risk is often considered a form of piracy insurance for those at risk of having their goods stolen. about the details of piracy insurance here. War risk insurance is typically retained by companies and investors in these fields:

  • Shipping
  • Logistics
  • Aviation
  • Supply Chain
  • Manufacturing

Throughout modern history, many wars have begun with an attack on private shipping.

The disruption of private shipping lanes is one way to quickly strangle an enemy nation’s economy. Even in today’s world, countries rely upon open sea trade for many reasons.

Cargo War Risk Insurance

Likewise, any financier or executive in the field of global logistics realizes that piracy is on the rise in many areas of the world. Pirates can be encountered a long way from their known bases of operations.

A pirate attack can lead to the loss of all material and crew. Last, but certainly not least, is the matter of applying war risk insurance to modern threats of terrorism. War risk coverage can protect assets from issues such as terrorist hijackings and bombings. This is particularly valuable in areas prone to religious unrest.

The History of War Risk Insurance

War Risk Insurance PolicyWar risk insurance has existed for many decades. The need for war risk insurance was understood as far back as the dawn of World War I. However, not until after World War II did this coverage become cost-effective and commonplace.

In 2001, war risk insurance became more significant to the operations of many global companies. Private war risk policies covering aircraft were generally suspended after the September 11th terrorist attacks, leading to federal intercession.

Private war risk policies now cover aircraft as before, but with much lower indemnities. Although the federal government has instituted an insurance scheme for aircrafts from the major commercial airlines, many investors will still seek a private policy.

Categories of Damage Covered by War Risk Insurance

War risk insurance covers damage due to acts of war. This can include hijacking, revolt, rebellion, insurrection and invasion.

Generally speaking, terrorism is classified under the types of damage covered.

Some policies cover damage by chemical, nuclear or biological agents. However, such coverage is substantially rarer than the other forms of protection.

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Types of War Risk Insurance

There are generally two types of insurance provided as part of war risk:

  • Cargo Ship Protected By War Risk InsuranceWar Risk Liability: War risk liability insurance covers the value of the cargo in the craft at the time it is attacked. It can also cover the value of the personnel being transported in the craft. Generally, war risk liability assumes all the cargo will be lost in an attack.
  • War Risk Hull: War risk hull insurance covers the value of the aircraft or watercraft that is the target of attack. War risk hull insurance is not always prepared with the assumption that the craft will be lost in the event of an attack.

How War Risk Insurance is Calculated

The calculation methodology for war risk insurance depends on the protection type. War risk liability protection is usually calculated based on a fixed indemnity amount. Since the terrorism events of September 11th, 2001, indemnities have been much lower than they typically were before those events.

War risk hull protection is calculated based on the value of the aircraft or watercraft that will fall under the policy’s protection. The value of the craft is usually established by adjusters in the employ of the insurance company.

Premiums vary based on the stability of the regions and countries where the craft will start, end and pause on its journey. Providers take many factors into account when determining the stability of each country.

How War Risk Insurance Differs From Political Risk Insurance

Political risk insurance is a very typical form of asset protection for investors and firms working in a politically unstable area. Generally, these areas are not expected to succumb to rebellion, revolution or foreign invasion — but the “duly constituted” government may expropriate foreign assets or repudiate contracts.

Protest And War Risk InsuranceIn cases such as this, political risk insurance is used to defray the value of lost assets and resources. In a nutshell, political risk insurance protects against the corruption and caprice of authorities in countries where there will be no legal recourse in the event of corruption. Thus, political risk insurance is used in areas like China and the Eastern Bloc.

War risk differs from political risk because the danger in war risk is represented by an outside agent. Civil unrest, invasion, military coup or terrorist overthrow are all covered by war risk insurance. This is because it is broadly assumed that these outside actors will be hostile to foreign contracts held by their predecessors.

In most areas of the world, the risk of terrorist attack is indeed low. However, executives and investors need to realize that their assets make particularly tempting targets.

Agents of political unrest, whether they are motivated by religion, nationalist sentiment or an extreme political agenda, are motivated to destroy symbols of foreign “power.”

Evaluate the Level of Need for War Risk Insurance

Some areas of the world present a growing need for war risk insurance:

  • The Eastern Bloc: Former Soviet countries have demonstrated that they may be involved in brief, highly destructive altercations with Moscow on very short notice. Likewise, many political radicals in these countries can still be described as “anti-capitalist” and may lash out at foreign holdings, including aircraft and sea vessels.
  • War Risk Insurance Prone AreasThe Far East: Although many observers consider the risks to be minimal, the recent succession issues in North Korea have made it more likely that regime will seek to display power by projecting naval force throughout the Korean Sea. Likewise, there is an ever-present danger of a ground war, however brief it might be.
  • The Middle East: The Arab Spring uprisings have caused tensions to mount in many areas of the Middle East. The Middle East attracts a large number of war risk insurance policies because Iran, a major regional actor, is known to be a state sponsor of terrorism with a high level of motivation to disrupt “western” economic activities.
  • Others: Recent events have raised concerns about civil unrest even in formerly stable areas of the world. For example, many investors are contemplating the once unthinkable possibility that prolonged unrest may strike Greece, resulting in regime change.

For most of human history, wars have been classed alongside “acts of God” as events that invalidate outside insurance. For the first time, global investors can seek protection against these once unfathomable disasters, providing they can evaluate their level of risk.

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