Political violence modelling is still more art than science

Napoleon Montes, Head of Hiscox crisis management, Miami, is shifting the lens on political violence risks.

As social unrest becomes more complex and widespread, the traditional tools used by political violence (PV) insurers to model strikes, riots and civil commotion (SRCC) are no longer enough. Napoleon Montes, head of Hiscox’s crisis management business in Miami, says the PV market must evolve its understanding of exposure beyond the blunt instruments designed for natural catastrophe risk.

“Most of us [PV underwriters] still use things like RMS that are geared towards natural catastrophe and provide simple aggregation of exposure,” Montes says.

That works when modelling windstorms or earthquakes, but SRCC needs a different approach, he suggests. Under Montes, the insurer began building its own methodology following a series of PV shocks that began in Latin America in 2019.

“After the Chilean protests, and when the Covid-19 pandemic started, we put together a working group to analyse our apps. At the time, most of the market was still talking about blast zones, but for SRCC, that’s no good,” he explains.

There is a pressing need to develop better analytics and modelling for PV as an emerging risk, particularly given the PV product’s growth in capacity being deployed, and the soft market pricing pressures facing underwriters globally.

“The modelling is probably the bit that’s missing most,” Montes says. “What makes our product more difficult is the human element. Where there are humans, there is social unrest but it’s not like cat. The PV in PVT is where we still have a lot of work to do. Most of the tools specific to this business come from terrorism because that’s been the history of this line of business post 9/11.”

PV is still a maturing line of business, he emphasises. In a line of business that prizes underwriting knowledge and expertise, data, analysis and modelling are still developing.

“If this market was a human, it would be a young adult. I wouldn’t say that it’s fully mature,” Monte says. “It has a strong personality, its own life, it’s self-sufficient and sustainable, but there are still elements of the personality that need to develop.”

Reinsurance pressures

One of the current limitations facing the PV market, he says, comes from the way reinsurance contracts are written. PV is typically underwritten on a direct and facultative (D&F) basis, and this portfolio of per risk business is then reinsured by treaty.

“When you buy treaty reinsurance protection they talk about the data, and that puts shackles on you,” he says.

He points to Mexico City – “many times bigger than London” – as a case in point. “If they say you can only have this amount of capacity for such a vast city, that’s where we came up with our own in-house version of the modelling to take into consideration industry types and to be able to model the probable maximum loss.”

Hiscox has a partnership with crisis advisory firm Control Risks, incorporating its geopolitical data, including civil unrest heat maps, in a bid to build a more dynamic model.

“That’s one tool that does work well for the human factor – we’re not so irrational, it seems,” Montes says. “There are certain areas where you can accurately predict that patterns will form. In Chile’s protests, for example, you have the Plaza Italia, where everybody congregated, and which becomes your ‘ground zero’ for this type of event.”

Data-driven, but not deterministic

Hiscox’s built SRCC model has expanded from six risk factors to more than 35. These now include variables such as unemployment, inflation, GDP per capita, and food prices.

“When we talk about the Arab Spring, it was largely influenced by wheat prices,” Montes notes. “Control Risks provide country risk scores, which help with factors such as governance and corruption ratings.”

Still, he cautions against treating models as crystal balls.

“If we were able to accurately predict the future, we wouldn’t be in this line of business,” he says.

Instead, Hiscox uses the model to adjust exposure at a granular level. He cites Peru’s mining sector as a classic example of where economic cycles can generate social tension.

“If there is a world economic recession, that will more than likely lead to social unrest around the Peruvian mining sector, perhaps with a lag of 12 to 18 months,” he explains.

“They have a local tax, called the canon system, giving a percentage of profit to local communities. If there’s a recession, local communities don’t understand why their share seems to have gone down.”

Distorted signals from the market

Despite these forward-looking efforts, SRCC underwriting is still shaped by broader re/insurance market dynamics. Carriers have continued to pour capacity into this diversifying specialty line of business.

“We’re just a small piece in a large puzzle,” he says.

“Ultimately, we’re insurers, and this is a matter of supply and demand. Rates continue to go down because there’s so much supply of capacity, and the reason why there is so much capacity has little to nothing to do with our niche within this market.”

He believes oversupply in US natural catastrophe and casualty lines is driving capital into specialty risks. On paper, PV portfolios in Latin America appear profitable, he suggests, largely because the losses that the drove standalone market were largely sustained by property business.

“Yes, there have been significant losses, but a lot of those losses get hidden within property,” he explains.

“In 2019 we didn’t pay for most of the losses in Chile, or for the Yellow Vests claims in France between 2018 and 2020, or the Black Lives Matter claims in the US in 2020. Even in South Africa in 2021, a lot of the losses were paid by the treaty reinsurance market.”

This, combined with the lack of historical loss data for standalone PV, has likely skewed the rate-on-line picture, he suggests.

“The property all-risks market took the losses, then excluded them, before buyers turned to the PVT market to find continued protection in places such as Chile,” Montes says.

Watching Latin America closely

While 2024 was expected to be volatile due to a surge of elections globally, Montes says the year passed with surprisingly few losses.

“Overall, it was a relatively quiet year. There were no large losses, certainly not in Latin America,” he says.

But looking ahead, he sees potential flashpoints in Chile and Central America.

“In Chile, for example, it looks like the right may come back into power, and that may generate some social unrest, depending on how strongly the pendulum swings.”

Montes is also concerned about the long-term effects of deportation policies under the Trump administration.

“It’s not going to express itself immediately, but it could have long-lasting repercussions. Of course, many innocent people are going to be deported, but there are also a lot of members of gangs and criminal organisations that will be deported, which is likely to stir up serious problems within their home nations, in places such as El Salvador.”

In the Andean region, meanwhile, the security outlook has deteriorated.

“Five years ago, I probably wouldn’t have mentioned Colombia, but in the past two to three years, they’ve had major setbacks in some specific areas, back to being controlled by the guerrillas,” he says. “Ecuador is also a major concern, due to criminal organisations, and events continue to be out of control.”

Asked where the SRCC market goes next, Montes offers a measured reflection.

“Our line is still more of an art than a science,” he says. “We don’t have enough frequency, such as you see in property, which contributes to the modelling sophistication. We need to rely a lot more on data, and make better use of models, but I think the ultimate decision comes with experience – more art than science.”

Gain further perspective, download our latest report – Political Violence: Underwriting in an Age of Insecurity.