Insured losses from UK riots to be manageable, with claims below £250m: report

Insured losses from the recent unrest in the UK are expected to remain at manageable levels, with limited impact on insurers’ credit profiles, according to credit agency Morningstar DBRS in a market commentary.

The main reason for manageable damages is the UK’s Riot Compensation Act 2016 (RCA), which states that one-off damages of less than £1 million (US$1.3 million) per property can be recovered from local police authorities, limiting total losses to the UK insurance industry to below 250 million pounds ($319 million), the report said.

However, the UK riots “could depress the profitability of certain commercial insurers, depending on the extent to which business is affected”, said the report titled “Loss from recent UK riots expected to have marginal impact on the British insurance industry’.

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“We expect that UK insurers will ultimately bear a relatively small share of the total economic losses from the riots. We note, however, that business interruption losses resulting from vandalism, robbery and potential curfews, as well as large claims, are not covered by RCA. Large companies and retail chains are likely to rely on separate business interruption coverage under their commercial insurance policies,” the report said. (Economic losses include both insured and uninsured losses).

Rising losses of SRCC

The UK unrest will add to the concerns of strike, riot and civil commotion (SRCC) insurance and reinsurance providers globally, which have seen an increase in the frequency and severity of SRCC events over the past decade, Morningstar said, noting that these claims have led many insurance companies to reduce policy limits for these risks or drop coverage from standard insurance policies altogether.

Large commercial clients have begun to rely more on standalone SRCC insurance providers in the London market as well as specialist global reinsurers, the report said. “However, even these providers have recently limited the risks they cover, particularly in traditionally volatile parts of the world.”

The costs of such events can be considerable. For example, economic and insured losses from just seven incidents of civil unrest in recent years cost about $13 billion, Allianz Commercial said in a report published in April 2024.

The recent riots in Britain began on July 30 after a stabbing, which killed three children, was falsely blamed on an immigrant. The 17-year-old stabbing suspect was born in the UK.

Morningstar said these riots — which have caused major economic losses — may cause traditional home and auto insurance providers to reconsider how they offer these coverages as part of their standard policies. (The report noted that SRCC’s coverage is part of the specialized war, terrorism and political violence insurance market, which offers coverages that complement those under standard auto, business and homeowners insurance policies.)

Types of coverage

The report went on to describe the types of policies that are available to provide coverage to help rebuild or replace assets damaged by episodes of vandalism and robbery.

For example, standard home and car insurance policies in the UK typically cover damage caused by vandalism, including fire and robbery, the report said. “However, auto insurance policies that only cover third-party liability do not protect against physical damage, including any loss resulting from riots, civil commotion or vandalism.”

The report explained that only all-risk or standard auto policies will cover physical damage, including riot damage.

“In the UK, standard commercial insurance policies usually cover physical damage to premises in the event of riots. Loot losses could have a separate sublimit if contracted. Glass coverage is usually subject to separate limits and deductibles. These policies may also offer optional loss of income (business interruption or BI) protection for an additional premium.”

Because BI coverage is only triggered by direct physical damage to the premises, some business customers may opt for additional coverage under so-called “civil authority provisions” which “provide protection for lost income and additional expenses if the police or other civil authorities I forbid. access to the property, for example, in the event of a shutdown.”

UK Riot Compensation Act explained

The Morningstar report said the UK riots would be a major test for Britain’s RCA, which was adopted in 2016 after the London riots of August 2011, when the insurance industry paid out around £200m (255.3 millions of dollars) in damages.

Historically, local police authorities in Britain have been required by statute to pay compensation to those who suffer riot losses – a principle that was codified in the Riot Act 1886, Morningstar noted.

“However, the riots of 2011 proved that the Riot Act 1886 was not fit for purpose in the modern world. For example, it was unclear whether damage to cars or business interruption losses were covered, which triggered unnecessary litigation following the 2011 riots,” the report added. “The RCA has simplified and clarified the procedure for claiming compensation from police authorities for property damage caused by riots.”

The RCA allows insurers, who have paid claims for damages, to subrogate and claim compensation from the police authorities.

However, RCA limits claims to £1 million per property and excludes cover for BI losses, meaning that most home and motoring losses are covered by RCA, but any loss over £1 million is excluded by RCA, the report explained.

“This compensation mechanism requires victims of criminal damage or loss during a riot to first submit a claim to their insurers. If the claim is denied or the victim did not have insurance, then they can seek compensation under the RCA directly from their local policy authority,” Morningstar added.

“To qualify for compensation, victims must demonstrate that the injury or loss was the result of a riot and submit a claim within 42 days of the date the riot ended,” the report said.

Photo: An unruly crowd clashes with police on Tuesday, July 30, 2024, in Southport, northwest England, near where three girls were stabbed to death at a dance class the day before. (Richard McCarthy/PA via AP)

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