SMEs cannot afford to ignore terrorism insurance

By KENNETH OBALLA

Terrorism has become a global reality that businesses have to consider in their risk planning. During the Westgate mall attack, vehicles and assets for SMEs were damaged or destroyed. Luckily, some insurers paid up despite the firms not having terrorism cover.

The terror threat is growing when Africa is working harder to increase intra-regional trade, with new protocols allowing for free movement of goods, services and people across the borders.

This means more businesses are exposed to terrorism, either in their countries of origin or abroad. To mitigate these risks, it is crucial that terrorism insurance becomes a part of risk planning for businesses.

While more insurance companies today offer terrorism insurance cover, the important news is that local companies have developed the capacity to offer reinsurance services on terrorism risks.

The advantage of these home-grown companies is that they have local knowledge, which is important in guiding insurance companies in designing the most appropriate terrorism covers.

But this role should not be left to the private sector alone. There is need for some form of State participation as happens in Britain, France, Israel and South Africa

Unlike most natural catastrophes like, say, earthquakes that have identifiable high-risk areas, there is no such prediction model for terrorism, making it difficult to develop appropriately priced products.

In the UK, for instance, surplus funds from compensation of a terrorism event are used to build up reserves through purchase of Catastrophe Bonds. Once the reserves are exhausted upon payment of claims, the government would make funds available to pay further claims.

In France, the state is the reinsurer of last resort. The reinsurers (pool members) provide a first layer of cover worth $2.3 billion (Sh204 billion) as the industry’s retention. Above this, the French government provides unlimited cover.

In the US, each insurer has a deductible of 20 per cent of their earned premiums. Insurers can then recover 85 per cent of their losses from government, assuming the event is certified. Aggregate limit of all losses is $100 billion (Sh8.8 trillion).

It is time African governments worked with local insurance and reinsurance firms to find means of addressing the growing risk of terrorism and its threat to businesses.


Mr Oballa is the head of training at ZEP-RE.
Source: Business Daily