Quarterly Review | Summer 2024

In 2021, a new term appeared on the World Economic Forum’s annual list of the top ten biggest threats to international prosperity and security: “social cohesion erosion.” Every year, the WEC polls hundreds of experts in a range of fields (commerce, academia, government, among them) and then compiles its top-ten list for the Global Risk report it releases in January, ahead of the summit in Davos, Switzerland. Unsurprisingly, climate-related crises (including, in some recent years, climate action failure) and violence (terrorism, for example, and geopolitical conflict) tend to be featured on the list perennially. Also unsurprisingly, “infectious diseases,” which is a periodic entry on the list, came in first in 2021. But after an unprecedented year of worldwide protests against police brutality and public health restrictions, the risk of political and social upheaval was seen as significant enough that it took the ninth spot in 2021. In 2022, it moved up to fourth . This year, it’s in the third position, with a slightly different name, societal polarization.

The rather sudden appearance and then rapid ascent of this concern led the Insurance Institute of Canada to commission a report about social and political risk and unrest as part of its Emerging Issues series. The report was released in 2023, and its writer, Paul Kovacs, took a comprehensive look at what exactly is meant by “social cohesion erosion,” why it is increasing and how it is manifested, and how big a problem it is likely to be for the Canadian insurance industry.

First, the good news: strikes, protests and riots—perhaps the most concrete and immediate expressions of social strife—have not proven as significant a problem for insurers (or in general) in Canada as they have in recent years in the U.S., and some European and Asian countries. There are fewer such demonstrations in Canada and when they do happen here they tend to be more peaceful and less destructive; even the trucker convoy in Ottawa in 2022 resulted in “no measurable cost” to Canada’s insurance industry, says Kovacs, who is Executive Director of the Institute for Catastrophic Loss Reduction and an adjunct professor at Western University. The most common displays of civil disobedience in this country have tended to happen when a Canadian team loses in the final series of the Stanley Cup playoffs.

On the other hand, Kovacs cautions in his executive summary at the start of the report that “Political risk and social upheaval are expected to increase in Canada and around the world over the next 5 to 10 years.” In fact, he writes, “The risk of damage and disruption from violent social unrest incidents in Canada is likely greater than the risk of loss from terrorism,” a striking comparison.

Social unrest is by nature unpredictable; it can take hold fast (and faster than ever now, thanks to social media) and go in unexpected directions. One need look no further than the trucker convoy for an example: The length and disruptiveness of that event took almost everyone not participating in it by surprise. Neither are the triggers of social unrest in Canada limited to what is happening within our borders; this past spring, protestors set up encampments on campuses across the country—as they did in several other countries, including the U.S., England, Australia, and the Netherlands—demanding that universities divest from companies doing business with Israel. Many of the encampments remained in situ much longer than expected; the University of Toronto ultimately went to court seeking an injunction to remove the protestors.

For all these reasons, it behooves Canadian insurance professionals to be aware of the causes and consequences of social discord and to be prepared to discuss them with clients. Damage resulting from social strife has, in the past, led to upwards of $1 billion in insurance claims. Kovacs tracked several recent examples of such costly political upheaval, including in Chile in 2019, where a four percent increase to subway fares sparked months of protests, during which significant looting and vandalism took place. And in France last year, more than a million people demonstrated against the increased age of retirement; subsequent to that, rioting took place after a policeman shot and killed a 17-year-old boy of Algerian and Moroccan descent in a Paris suburb; thousands of cars were torched in the ensuing riots, as well as hundreds of buildings and a great deal of public property burned.

While they often coalesce organically and can, to the outsider, seem to come from out of the blue, protests are not conceived in a vacuum and their origins tend to brew for weeks and months and even years in advance. This year’s WEC report on global risk draws a clear link between societal cohesion (or the erosion of it) and the sixth threat on its top-ten list, a new category in 2024, which is a lack of economic opportunity. Respondents to the WEC survey pointed to a lack of economic opportunity as stemming from a range of international developments, including the recent worldwide economic downturn and ongoing inflation. “Without careful management of the large-scale economic transformations that are taking place,” says the WEC report, “economic mobility will stall and reverse.” Further, the report argues that “the consequences for societal cohesion and political outcomes are wide-reaching, threatening standards of living for a large segment of the population in many economies.”

Kovacs makes a similar point. “There are some immediate things that are causing a lot of angst in society,” he says. The 2023 IIC report on political risk points to the rising costs of food and fuel as potential immediate threats. Kovacs writes: “Rising inequality in income and wealth is an important long-term factor contributing to the risk of civil unrest and erosion in social cohesion. Many believe that present systems are unfair and are working to benefit a privileged minority, and they are becoming vocal that they want change in the status quo.”

The No. 1 spot on this year’s WEC global risk list is misinformation and disinformation. This risk too, said the respondents to the annual survey, is tightly linked to the risk of societal discord in that one feeds the other. “Polarized societies are more likely to trust information (true or false) that confirms their beliefs,” says the WEC’s 2024 report. “This then sows the seeds for further polarization… Societies may become polarized not only in their political affiliations, but also in their perceptions of reality, posing a serious challenge to social cohesion.”

With elections in both the U.S. and Canada on the horizon—and with the January 6 insurrection of 2021 and the trucker convoy not very far in the rear view—there is good reason for insurance professionals to be alert to what is being disseminated in social media echo chambers. “There is the opportunity for mis- and disinformation to accelerate behaviours,” says Ray Monteith, Senior Vice-President with HUB International Risk Services Division. “That was evident in the freedom convoys and the COVID protests; there was a tremendous amount of misunderstanding and miscomprehension. It’s evident in the following that Donald Trump has, and we see it in Canada as well. There are people who are quite happy to hang their hats on something that is absolutely unfounded in fact.”

“One of the challenges associated with the whole conversation around civil disobedience and political unrest is that it can escalate rapidly, with little notice and without anticipation,” says Monteith. But as much as they may cause surprise, widescale protests are essentially “black swan events,” he says. Monteith explains that black swan events are ones that, in theory, could not have been foreseen but in fact have often already been both imagined and experienced. Monteith says the insurance industry “can’t afford to ignore signals that are emerging either at home or abroad” of the likelihood of social unrest. In fact, he says, uncertainty is an integral aspect of the insurance industry, and “it’s incumbent upon all of us who are involved in risk management” to imagine and anticipate the risk presented by social polarization.

One important strategy in fending off the effects of mis- and disinformation is ongoing communication, between insurers and with their policyholders. When professionals build strong relationships with each other and with their customers, they have an easier time discussing questions or concerns they may have about a possible crisis. “My biggest focus and my biggest aim is collaboration,” says Dan Elliott, Head of Cyber Resilience (Australia), Zurich Resilience Solutions, Australia. “The insurance industry has started to do a good job, but can always improve, on having collaborative discussions with their clients and partners in all the different industries, so that if people hear something that doesn’t make sense or sound right, they know they have somebody to talk to.”

What else can the insurance industry do to mitigate risk presented by an erosion in social cohesion? “Think about what it might mean for you,” suggests Kovacs. “Have clarity for those who care about what’s included in insurance. So you sign an insurance contract and you ask the customer, ‘Are you worried about this? Would you like insurance for this? Well, here’s what we can do and here’s what we just can’t do.’ It needs to be carefully thought through by the industry in the ongoing conversation with the customers.” Monteith would agree. “It is incumbent on the industry to be agile enough to respond rapidly to changing events,” he says. “The insurance industry is going to continue to be credible if it understands, ahead of time, how to respond to significant, disruptive events, regardless of whether they’re climate-related or related to political or civil unrest.” He points to the other side of the equation: “It’s also incumbent on business owners and citizens to ensure that their policies are going to cover them, and to understand that there are implications associated with a changing political climate.”

Kovacs counsels insurers to confer with their counterparts in countries that have more experience managing political risk. “This [issue] is probably further along in the United States and Europe than it is here. Call your colleagues,” he says. “Don’t surprise Canadians because you’re not talking to people in your own company or some of even your competitors in places like the United States and Europe, where this conversation is a little more active.”

And of course, it’s always instructive to consider what has already happened in Canada. For example, while the so-called Freedom Convoy in Ottawa did not, at the end of the day, lead to millions of dollars in insurance claims, there was a close call: The truckers’ stamina led Justin Trudeau’s government to invoke the Emergencies Act for the first time ever, and at one point, insurers were advised that they might be required to revoke the insurance coverage of drivers who did not comply with police instruction. This caused the industry to sit up. Did the to-date untested Emergencies Act really allow this? Could the government really do that? It turned out that yes, it could (even though, in the end, it didn’t). Good to know.

As Paul Kovacs counsels in the IIC report on political risk, one of the most important ways the insurance industry can gird itself for the anticipated rise in civil unrest in Canada is by reviewing and clarifying relevant policy wordings. “Canadians should know before major events how insurance will support recovery if damage occurs,” Kovacs writes. “The industry should clearly communicate to policyholders and other stakeholders which losses during political protests are and are not covered.”

Although we don’t have a lot of experience with losses resulting from civil strife in Canada, there is the opportunity to learn from incidents of confusion and disagreement that have arisen in other countries about efforts to make claims related to protests and riots. For example, after the widespread protests that followed the murder of George Floyd, the department store Nordstrom said it should only have to pay the agreed-upon deductible once for damage at multiple locations because the protests were essentially “a single occurrence.” Some insurers disagreed, arguing that looting incidents at different stores were each “independent events… subject to established deductibles,” thereby leading to a reduced claim payment. How might a similar question have played out in the context of the trucker convoy, Kovacs asks. Would it “have been covered as a single event with disruptions in many locations, or as many events?” These kinds of questions can be raised and addressed in future policies.

Canadian insurers were mulling over other relevant questions in real time in the early days of the convoy, including this one: Would stores in downtown Ottawa be able to make insurance claims on the basis of business interruption? Quite possibly not, said sources consulted for a February 2022 article in Canadian Underwriter. In fact, they explained, coverage for damage caused by civil disobedience tends to be an exclusion (a contingency that is explicitly not included) in many P&C policies, although sometimes customers choose to purchase extensions which provide some coverage for these types of events. But even with such an extension, said one source in the CU story, a business owner who opted to close their shop during the convoy may have been out of luck on a claim, as the wording of the extension may have required that there be physical damage and/or that the closure of the store be ordered by civil authorities. So the person who decides to send their staff home as a precaution may find that they are not able to recoup their losses through their insurance policy. Such matters are “never clear-cut” the source told CU.

Indeed, “the changes that become relevant to understand are exclusions,” says Ray Monteith. “Whether wording in a policy specifically excludes or or does not specifically exclude those events that could result in contingent damage. A broken window is a broken window,” he points out. “What is the cause of the broken window?” Insurance policies need to make clear whether a client will be reimbursed for the damaged window unless it was caused in a riot, or even if it was caused in a riot, says Monteith. He notes that some insurance companies are moving in the direction of recognizing the growing potential for civil unrest and inserting clauses into coverage to ensure there are no exclusions for it. It’s not necessarily a “blanket” approach in the industry, he adds, but insurers are becoming more responsive to clients’ needs vis a vis social unrest “as there is more and more evidence that Canadians are following form with citizens around the world who are protesting government policy or business policy at home or abroad,” says Monteith.

Some insurance companies offer coverage specific to the fallout of civil unrest, whether as an extension of an existing policy (as discussed above) or as a standalone product. For example, clients might look at a policy that covers “impairment of access” in the event of a prolonged protest in the same location as their business, with clear criteria as to how far away the impairment extends and whether or not physical damage is required in order for the client to make a claim. Some of these policies included “interdependency coverage” that might apply when business interruption at one location affects alternate locations of the same company. There are also policies that cover for “abandonment,” which can protect clients who decide to close their businesses regardless of instruction from civil authorities. Such a policy might include the services of a consultant who can help the client evaluate the potential threat posed by an anticipated or ongoing act of civil disobedience and whether closure of the business is in the client’s best interests. Consultants attached to policies specific to civil unrest might also help insurance clients navigate such unfamiliar terrain as managing public relations, briefing boards of directors (in the case, for example, of a university experiencing a protest or encampment), or speaking with family members in the event of injuries resulting from social unrest.

“There is a multitude of different levels of care that the consultants are able to offer,” says Tiffany Wanklin, Vice-President and National Crisis Management Specialist at Aon, who works with public-facing clients to make sure they are aware of the potential risks posed by civil unrest and of the coverage options available to them. “A lot of clients aren’t prepared to deal with these sorts of incidents. They may have an internal crisis management team that can deal with typical incidents that a business tends to see, or a school tends to see, but they may not necessarily have the expertise to deal with civil unrest. That’s why the consultants are part of the policy, so that clients can have access to professionals who can assist them.”

Civil unrest is not new in Canada, but there is a growing awareness in the insurance industry of the need for “a safety net for policyholders against acts of what can be associated with political risk,” says Ray Monteith. “What that comes down to in terms of coverage is damage to property or personnel or disruptions in business.” Suppose you do business in the United States and are feeling nervous about the coming election in November. Can you take out a policy to protect your business for interruptions or damages associated with acts of political unrest? “The answer is yes,” says Monteith. “We can carefully craft coverage and ensure that wording exists, that wording can be adjusted or added into policy, so that it is clear whether damage or business interruption arising from civil unrest will or will not be covered.”