Comprehensive cover may solve Korean plight

SEVEN years after the thawing of the Cold War, North Korea, the last of the old-style Stalinist republics, is still one of the most mysterious and impenetrable countries in the world.

In Pyongyang, the scrubbed and gleaming capital, a handful of diplomats from neutral and former Communist countries go quietly about their business under discreet surveillance. Foreign journalists are seldom admitted; the few tourists and businessmen who visit are steered around a circuit of approved sites under strict supervision.

Even the spy satellites of the Western intelligence agencies are unable to provide more than vague clues about the ways of the ruling Workers' Party, and the "Dear Leader", Kim Jong Il. But in the last two years, the government has extended a welcome to an unexpected group of partners: British insurance men who, Pyongyang believes, may provide an escape from the pit into which the country has dug itself.

For this has been the loneliest and most ruinous period since the Korean War. In 1994, four decades after founding his "workers' paradise", Kim's father, the "Great Leader" Kim Il Sung, died, leaving an alarming power vacuum. Depleted by shortages of fuel and raw materials, the economy has rusted to a virtual standstill, hamstrung by archaic technology and a lack of foreign exchange. Finally, last summer, torrential floods washed away an already feeble rice crop, leaving 500,000 homeless and causing an estimated pounds 10bn of damage.

The North's traditional alliances have fizzled out, as China and Russia have moved closer to the capitalist economies of Asia and the West, including its hated cousin, South Korea. But early in his reign Kim Il Sung took an unexpected and little-known precaution. Despite a lifetime spent propagating the doctrine of juche, or self-reliance, the Great Leader did what every good father does for his family: he took out an insurance policy.

Since 1957, the government has been insuring ships, buildings, factories, livestock and crops through the state-owned Korea Foreign Insurance Company. But in a collectivist economy, where the government effectively holds in one pocket what it is insuring from another, this would be self-defeatingly circular. So the KFIC reinsured a proportion of its risk, much of it on the European market.

For years the arrangement worked smoothly enough. But in 1994, the country's mountainous rice farms were struck by spring floods, then a drought, then summer floods, and finally autumn typhoons. Last year, the floods were even heavier, and as the rains came down, so did the claims from the directors of the ruined collective farms. Enter the insurance men from London.

Since 1994, the twice-weekly flight from Peking to Pyongyang, North Korea's main link with the outside world, has transported growing numbers of brokers and loss adjusters, dispatched by the European reinsurers to assess the KFIC's claims. Satellite photographs have been scrutinised, and inspectors have been given unprecedented access to remote corners of the republic. Brokers are reluctant to discuss the exact scale of losses, and in so obsessively secretive a country, precise figures are hard to come by. But the disasters are described as "catastrophic" by Brent Demnar, an Australian loss adjuster.

After being burned once, the reinsurers redrew the contracts to exclude most kinds of flood damage. Even so, a syndicate of European insurers, brokered by the British companies Fenchurch and Bain Hogg, anticipates losses variously estimated at pounds 30m to pounds 50m on damage to property alone. Commercial Union faces a bill of more than pounds 4m as its contribution towards a pounds 14.5m computer centre which burned down in Pyongyang earlier this year.The preliminary conclusion is that, at the height of the bitter winter, with fuel shortages leaving most buildings unheated, the sprinkler system froze up.

Other landmarks insured on the London market include the People's Opera House and the People's Department Store. When the contracts come up for renewal in June, the KFIC is certain to face even tougher premiums. "You're looking at losses from those floods of pounds 80m, and at least half of that was reinsured on the London market," says Alan Bennett of brokerage Swire Fraser. "For every pound you get in premiums, you're probably looking at pounds 200 in losses."

But the arrangement suits both sides. For Europeans, the strict American embargo on virtually all commerce between North Korea and the US enables them to make inroads into a virtually untapped market. "The potential is enormous," says Mr Demnar, "and all the basic machinery is there, although it's decades behind even somewhere like eastern Europe. What they need is an enormous injection of capital."

Therein lies the attraction of insurance. With help from Fenchurch and Swire Fraser, the KFIC has an extraordinary ambition: to draw in foreign funds by establishing itself as an international insurer. "They have an image problem," admits Mr Bennett, "and it is going to be a bit difficult to persuade people that a North Korean insurance company is secure. But we've advised them to adopt a softly-softly approach, and start dealing first in places like Cuba, Vietnam and Hungary to build up their reputation."

The day when you will be able to insure for fire and theft with the Dear Leader is still a few years off but, according to Mr Bennett, the North Koreans have something of an affinity with the British. "They talk about the Yankee imperialist dogs from time to time, but they don't seem to have any problem with us. Even about the Korean War, they're very understanding - they say that we were just doing our US masters' bidding."