Geopolitical risk: A growing threat to insurer profitability
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Geopolitical risk: A growing threat to insurer profitability

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Geopolitical risk is at a new level of intensity for insurers, changing the ground rules for underwriting specialty products like political violence/terrorism (PVT) around the world. But it’s also making itself felt in other lines such as cyber as well as property-casualty products.

Introducing a recent Insider On Air webinar, Jack A. Kennedy, Research and Analysis Associate Director at S&P Global Market Intelligence, said insurers should be aware of the risks related to five interlinked themes: economic fault lines, geopolitical reordering/conflict, supply chain resilience, logistics and resource security.

Kennedy believes that the global political system, including trade and security alliances, is becoming more pragmatic and more flexible as states increasingly cooperate across spheres of mutual interest like supply chains, climate change and public health. “Countries will also contest across spheres of national security including sanctions regimes, dollar supremacy and sourcing critical minerals,” he said. “As we enter 2024 this potential volatility across economic and political spheres will remain a significant risk.”

Anthony Shappella, Deputy Chief Underwriting Officer at the carrier SiriusPoint, said that different lines of business will be affected by this heightened volatility: “Insurers need to proactively manage risk across all products. One challenge is that many products can accumulate in the same geopolitical scenario… we’re learning a lot from what we have seen in Ukraine, for example in aviation/war. Also, specialty classes like marine have been fundamentally disrupted.”

Property, specialty (including political risk and violence), trade credit and cyber all have the potential to accumulate, Shappella pointed out. Ancillary classes such as accident & health, travel and event cancellation at risk, are also on his list.

Sandy Warne, Head of Terrorism and Political Violence at Howden Tiger, said that the uptick in civil unrest called for a reappraisal of terrorism and PVT books: “From a terrorism perspective, it was historically the cash cow of the market – it was loss free after the high severity linked to 9/11.

“In recent years that’s all changed. We’ve had the South African riots, the BLM movement, Chile riots, war in Ukraine and then Hamas/Israel. It feels like the world is at war and while PVT used to seem like a single risk, we and our clients now see the full spectrum of perils at play: strikes, riots, civil commotion through to coups.”

Lack of data hinders underwriters trying to manage PVT uncertainty, she added: “It’s not like the Gulf of Mexico where you can track wind. You don’t have that same ability to predict what’s going to happen from a civil unrest perspective.”

This modelling challenge has not gone unnoticed by reinsurers; they too are worried about the growing potential for unmodelled losses, Warne said. “Wars like Russia/Ukraine and Israel/Hamas were modelled as 1:200 year events and now there are two happening simultaneously, with widespread effects.

“It’s having an effect on reinsurers and treaty costs as capacity steps back. The cost of reinsurance is going up and retentions are being pushed up as well…. At 1/1, in some cases, insurers could be looking at a cliff edge in terms of their reinsurance coverage.”

From a trade risk point of view, the sheer breadth of flash points and the potential for conflicts – such as Israel/Hamas – to spread regionally is a concern, said Thomas Lott, Underwriter for Trade Disruption, Crisis Management at Convex: “Africa has endured a turbulent year with military coups and the growing influence of jihadist extremism. A key point to note is the limited response from the international community, intertwined with non-African powers competing for influence in the region.”

Lott said that the number of submissions received by Convex related to the China/Taiwan region has also grown, in response to heightened tension there: “The risk of confrontation in the Taiwan Strait is increasing and the market’s response is to restrict capacity, especially multiyear period policies.”

SiriusPoint’s Shappella emphasised the need for vigilance over cyber risk pointing out the strong link between geopolitical friction and cyber-attacks. Intensifying cyber-attacks are often a precursor to major physical escalation between states and can be a strong signal for a coming conflict.

“The cyber market is generous in BI coverage terms so it’s an area to watch. There has been talk about pulling some of that coverage, alongside ‘ransom’, but as far as I know it hasn’t pulled back on BI,” he said.

Shappella said that the 2020 state sponsored attack on the widely used SolarWinds IT management platform should serve as a warning. In that event, over 18,000 organisations unwittingly installed malware that had been inserted by state sponsored hackers into a software update.

Insurers should recognise that “non-damage BI” is a live issue in the context of geopolitical risk and that clients need a solution, he said: “There’s not a lot of data; it’s hard to model. But it’s clear that geopolitical events disrupt the movement of goods. It needs to be explicitly underwritten and priced for – it can’t be a throw in and in 2024 we need to see named peril for non-damage BI.”

Summing up, S&P’s Jack Kennedy said that geopolitical risk has assumed a new importance for the insurance industry after decades of relative stability.

“This shift towards the primacy and weighting of geopolitics is going to have an impact for years to come. National interest objectives are going to reorder relationships between countries, global trade and security partnerships.

“We’re going to see things like energy and commodity price volatility, supply chain disruption and compliance related issues connected with sanction regimes. These will all be influenced by armed conflict.”

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