September 7, 2022

Political Violence Risk Elevated in Chile Following Rejection of Landmark Constitution

Insights London Market

By Alexandria Wallis, Senior Underwriter

The Chilean people have strongly rejected a proposed new constitution to replace laws enacted by military dictator Gen. Augusto Pinochet in a historic referendum, increasing the potential for public protests and possible insurance losses.  

The first mandatory vote in Chile in 10 years saw 62% of the population reject the constitution and 38% approve it – an even wider margin of defeat for the legislation than polls predicted. The vote marks a key moment in Chile’s history and leaves the country – which had seen a period of heightened political tensions leading up to the vote – facing potentially years more of uncertainty while a new version is drafted. 

The referendum was held in response to deep-rooted dissatisfaction among the general population over inequality and the provision of public services in the country, which led to weeks of widespread disorder in 2019 when protests, riots, looting and destruction of property spread across the country. The unrest caused total losses worth $4.6 billion, as reported by Chile’s Construction Chamber.  

Following the unrest, an overwhelming majority of the Chilean public voted, in October 2020, in favour of rewriting the country’s constitution, leading to this moment. However, many voters felt the version presented was too radical and that it did not adequately tackle the root problems that led to the unrest in 2019.  

The referendum was also highly politicised, with opponents of President Gabriel Boric turning their back on the new constitution after he lent it his public backing. Boric’s support among the Chilean public has eroded significantly, with Bloomberg reporting a disapproval rating of 57% within weeks of Boric taking office in March.   

While many have celebrated the referendum result, swathes of the population on both sides of the vote will now be left unhappy. Those who supported the constitution are disappointed it has not passed, while those who voted against it are likely to feel discouraged as it could take several years for a new constitution to be passed and for their underlying concerns to be addressed.  

The Chilean Government will now launch a new constitutional process. However, deep disagreements between Chile’s ruling coalition and the opposition could delay setting this in motion. 

Rising risk of protests 

IHS Markit predicted on 5 September that nationwide protests are likely in the coming days, with violence more likely if decisions about the constitutional process are delayed beyond one week. If a failure to reach an agreement leads to a decision to maintain the current 1980 constitution, it would significantly increase the risk of widespread and violent unrest, IHS warned.  

Much therefore depends on how quickly the Chilean Government can set a revised constitutional process in motion and whether its approach will satisfy the public. A revised constitutional redraft is likely to seek an expanded role for the state, which many of the public initially voted against. This could also spark protests.  

At the same time, economic conditions are worsening for most Chileans. Since the 2019 riots, unemployment has risen to 9.1% from 7.2% (a rise of 26%) while inflation in Chile currently sits at 13%, higher than peer countries such as Mexico and Brazil, with the possibility to rise further. These factors, plus Boric’s inability to make much-needed reforms on social issues any time soon, could exacerbate tensions.  

Outbreaks of protests in Chile have historically occurred around significant dates, meaning, beyond any unrest related to the referendum, 18 October – the anniversary of the 2019 riots – could see an uptick of incidents.  

Insurance market monitoring closely 

The 2019 unrest prompted a withdrawal of insurance capacity from Chile, leading to rate increases and tightening of terms and conditions across the market. Many ‘All Risks’ policies added Strike, Riots and Civil Commotion (SRCC) exclusions to their wordings in the wake of the violence, leading to an upturn in demand for standalone Political Violence coverage among Chilean organisations. Arch Insurance International has remained in the market providing Political Violence solutions throughout.  

Local sources predict that in the event of fresh protests, they are less likely to spread beyond regional capitals and traditional hotspots with the extent of the violence and damage being significantly lower than in 2019. However, even a fraction of the damage may still have implications for the insurance market, which is monitoring the situation closely. It is possible insurance capacity could contract again if public disorder and violence intensifies.    

With continued and now heightened levels of political and economic uncertainty in Chile, the threat of political violence will remain elevated until the constitutional issue is resolved, and the Chilean Government navigates this unprecedented period in the country’s history. The big challenge the government faces is how to win support for a new constitution that will deal not only with past issues but also emerging trends such as rising inflation and unemployment at the time of any future vote.