Key Highlights
• Under the RCA, single claims below GBP 1 million will be ultimately assumed by local police authorities, limiting the overall losses for the British insurance industry to below GBP 250 million.
• However, large and medium business owners will likely need to rely on their commercial insurance policies for any single physical loss exceeding GBP 1 million, as well as for any business interruption loss.
Property damage caused by strike, riot, and civil commotion (SRCC) is part of the specialised war, terrorism, and political violence insurance market, which provides coverages that complement those underwritten under standard motor, business, and homeowners insurance policies. In the last decade, the rise in frequency and severity of SRCC events globally has prompted many insurance companies to reduce policy limits for these risks or drop their coverage altogether from standard insurance policies. In particular, large commercial clients started to rely more on standalone SRCC insurance providers such as the London Market and certain global specialised reinsurers.
Nevertheless, even these providers have recently been limiting the risks they cover, particularly in traditionally volatile parts of the world.
We expect total insured losses from the recent UK riots to be ultimately manageable for British insurance companies given that claims under GBP 1 million per property can be recovered from local police authorities under the UK Riot Compensation Act 2016 (RCA). Nevertheless, the recent episodes of civil unrest in various part of the UK could negatively pressure the profitability of certain commercial line insurers depending on the extent businesses are affected. The unrest in the UK will add to the concerns of specialised providers of SRCC insurance and reinsurance globally, which have dealt with an increasing number of unfavourable events in the past decade. UK traditional home and motor insurance providers can also reconsider how they offer these coverages as part of their standard policies.
What is Covered Under Most Standard Insurance Policies
Depending on the property's nature, several insurance products can provide coverage to help rebuild or replace assets damaged by episodes of vandalism and looting. For instance, standard homeowners' and motor policies in the UK will typically provide coverage against damages resulting from vandalism, including fire, and looting. Nonetheless, motor insurance policies that only cover third-party liability do not protect against physical damage, including any loss resulting from riots, civil commotion, or vandalism. Only all-risk or standard motor policies will cover physical damage, including those as a consequence of riots.
In the UK, standard commercial insurance policies usually cover physical damage to the premises in the case of riots. Losses from looting might have a separate sub-limit if contracted. Glass coverage is also typically subject to separate limits and deductibles. These policies may also provide optional loss of income protection (business interruption or BI) for an additional premium. Although BI coverage is only triggered by direct physical damage to the premises, some commercial clients opt to get additional coverage under "civil authority provisions" that provide protection for lost income and extra expenses if police or other civil authority bars access to the property, for instance in case of a curfew.
What is Covered Under the UK Riot Compensation Act 2016
The UK Riot Compensation Act 2016 was enacted following the London riots of August 2011, when the insurance industry paid approximately GBP 200 million in claims. Historically, local police authorities in the UK have been liable under statute to pay compensation to those suffering loss caused by riots and this principle was codified in the Riot Act 1886. However, the 2011 riots proved that the Riot Act 1886 was unfit for purpose in the modern world. For instance, it was unclear if damages to cars or losses from business interruption were covered, which triggered unnecessary litigation following the 2011 riots.
The RCA simplified and clarified the procedure for claiming compensation from police authorities for property damage caused by riots. The RCA also allows insurers who have paid claims for riot damage to subrogate and seek compensation from police authorities. However, it caps claims at GBP 1 million per property and excludes coverage for any business interruption losses. In practice, this means that most home and motor losses due to riots are covered under the RCA. In particular, any loss under medium-to-large commercial insurance policies above GBP 1 million would be excluded under the RCA.
This compensation mechanism requires that victims of criminal damage or loss during a riot first file a claim with their insurers. If the claim is denied or the victim did not have insurance, then they can claim compensation under the RCA directly from the local policy authority. In order to qualify for compensation, victims must demonstrate that the damage or loss was as a result of a riot, and file a claim within 42 days from the date the riot ends.
Potential Losses for the British Insurance Industry
The recent UK riots will be a major test for the RCA compensation mechanism as insurance companies try to recover losses from the local police authorities. We expect that British insurers will ultimately bear a relatively small portion of the total economic losses caused by the riots. We note, however, that business interruption losses resulting from vandalism, looting, and potential curfews, as well as large claims, are not covered under the RCA. Large companies and retail chains will likely rely on separate business interruption coverage under their commercial insurance policies.
We anticipate that total insured losses for the British insurance industry not covered by the RCA will remain below GBP 250 million. In our view, the magnitude of these losses will remain manageable for British insurers, with limited impact on their credit profile.
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