African Reinsurance Corporation (Africa Re.), the premier continental reinsurance firm, has warned its client firms in Ethiopia to apply precautionary measures when selling a political violence and terrorism policy.

This comes as demand for the policy coverage exhibits tremendous growth, with businesses starting to avoid potential losses due to conflicts. Alarmed by the ongoing political instability and recurrent conflicts across Ethiopia, Chaucer Group, an international speciality insurance and reinsurance company, has increased the risk rating for civil unrest to 3.7, up from three.

The civil war in Tigray Regional State, which involves Eritrean troops and the plodding killings of civilians across the country from intercommunal conflicts and insurgencies, has contributed to the increase in the risk level.

Out of 11 billion premiums the 18 insurance firms had written by the third quarter of the current fiscal year, political violence and terrorism insurance policies, also known as PVT, account for below three percent of their portfolio. However, claims they pay on these policies are likely to be much higher than for other policies, considering the large volume of assets the products cover. The policies give coverage to clients against losses due to riots, strikes, protests, and unexpected outcomes driven by political volatilities.

"We've alerted them to make risk management practice more stringent and avoid the accumulation of risk," said Habtamu Debela, country director for Africa Re. "The combined risks that could be involved in a single loss event, due to an increase in exposure to political violence, can be higher. We haven't, however, adjusted premium as we have not seen an accumulation of risk thus far."

Political uncertainty is already high, and it is difficult to know when and where violence could happen, which make both insurers and reinsurers exposed to a large number of claims, risking their financial statements, according to Ebsa Mohammed, an insurance expert and manager of Alpha Consultancy.

Deadly and destructive protests in the Amhara and Oromia regional states led to the loss of more than five billion Birr worth of properties during the two years before the ascent of Prime Minister Abiy Ahmed (PhD) in 2018, according to an individual who has seen an assessment report. Many of these losses were not covered with PVT, imploring businesses to scramble in buying new policies to cover potential losses.

"Such amount of loss would have been catastrophic to insurance firms if they were covered," said Habtamu. "With an increase in political risks, it would be appropriate to avoid risky businesses."