Press article - Hormuz fertiliser shock could trigger losses for the PVT market

Many underwriters remember how the Arab Spring at least partially originated from food shortages, which is stark reminder of the short link between food scarcity and civil unrest. The closure of the Strait of Hormuz and the consequent supply chain disruption affecting food supply and production are creating the conditions for future economic distress and civil unrest which will impact political violence insurer. 

First published by Insurance Day and reproduced with kind permission of the editor

As the conflict in the Gulf wears on, the political violence, marine and aviation war insurance markets remain in the  front line, earnestly recalibrating pricing models and bearing the brunt of early notifications. What is far less clear is where other insured losses will occur, and which classes will be obliged to respond. The political violence and terrorism (PVT) market is receiving notifications under war-specific covers but little else — yet.

Much media attention has focused on the Straits of Hormuz, not only as an energy chokepoint but as a conduit for materials critical to global agriculture. According to the UN Trade and Development body, around a third of seaborne fertiliser is transported via the Strait. At time of writing, supply chain disruption is ongoing, affecting food supply and production.

Irrespective of when the situation normalises, more significant consequences may be felt later, with delayed fertiliser application potentially resulting in lower yields globally. In April, S&P Global Market Intelligence’s report Economic and Industry Implications of Middle East Supply Disruptions noted that supply risks “have broadened well beyond primary energy to refined fuels, fertilizers and industrial inputs”, further highlighting the conflict’s growing impact on global food production.

While the PVT market does not insure against food shortages, it does insure the consequences. Two events that stress tested the PVT market — the pandemic and the Arab Spring — provide particularly important reference points. Many underwriters remember how the Arab Spring at least partially originated from food shortages, which served up a stark reminder of the short link between food scarcity and civil unrest.

Lessons from the past

The Arab Spring was fuelled by discontent felt by communities across North Africa and parts of the Levant. Frustration about food prices, corruption, exclusion from political processes and feelings of oppression eventually spilled out with unprecedented speed. The self-immolation of a vegetable trader in Tunisia sparked rapidly spiralling escalation, encompassing moderate protest, violent protest, rebellion, revolution and, in Syria’s case, civil war.

For PVT underwriters, the lesson was clear: underlying drivers of unrest are often foreseeable well in advance, but the timing and scale of losses are not. It also demonstrated how, once triggered, events can escalate more rapidly and with greater severity than typically allowed for in pricing assumptions.

The pandemic also notably challenged PVT underwriters’ assumptions. The disruption Covid brought exposed how quickly supply chains can fail under pressure, creating a need for more robust contingent solutions, with insureds now significantly better equipped than before 2020.

The pattern of warning signs from these events — food price pressure, subsidy strain and restricted supply — are now visible in hotspots globally and viewed by the PVT market as potential precursors to escalating civil disturbance.

The Russia-Ukraine war additionally demonstrated how conflicts can create food insecurity in countries not directly involved. When Ukrainian wheat shipments to African countries were blocked, several came very close to famine. While Europeans complained about escalating prices, for many in Africa and even parts of East Asia and the Middle East, some attainable foods were simply unaffordable.

As seen with the Arab Spring, the combination of food shortages, existing economic fragility and political tensions was a catalyst for civil unrest

Likely loss generators

The sequence of events commonly follows a pattern of escalation once social pressures reach a certain threshold. Strikes, riots and civil commotion is typically the first phase and the primary driver of losses. These tend to originate in middle income, asset-rich areas, rather than the poorest ones, where stronger expectations of access mean disruption to basic goods can trigger more economically significant reactions, often producing the largest and earliest claims.

Second, storage and logistics facilities become focal points for unrest. Bulk commodities, food storage, port facilities and distribution hubs holding large stocks in easily identifiable locations quickly become targets. When such behaviour targets supply en masse, accumulation risk increases rapidly.

After reaching logistics, the issue becomes system wide and fundamentally shifts from physical threat to systemic risk. Ports, transport corridors and distribution networks are met with strikes, blockades and operational disruption, triggering additional claims for business interruption.

The PVT market is currently only seeing claims under war-specific covers in directly affected countries, with claims for civil unrest due to increased pressure on social systems and essential-food prices yet to follow. It is highly likely however that claims will arise but not immediately, with time needed for economic distress to reach critical levels and trigger social instability. The longer the Strait of Hormuz remains closed, the greater that likelihood becomes.

The conflict’s immediate impact will continue to be borne by the marine war and aviation war markets and the war peril segment of the PVT market. For the broader PVT market offering — i.e. strikes, riots and civil commotion - potential exposure is less immediately visible and likely greatly delayed.

However, many of the drivers, dynamics and conditions that have previously produced claims are now in place. That delay between cause and consequence can induce a false sense of security and is historically where the market has been most exposed.

The hard-won lessons from Covid and the Arab Spring are highly relevant to the current situation and should not be underestimated. A complete breakdown of supply is not necessary for the PVT market to incur losses. With pressure on the price and availability of basic goods, even the perceived threat of it can alter behaviour sufficiently to trigger civil unrest.