A massive impact on the economy
Shifting political landscape
There is an increasing relevance of geopolitical risks overall, recognising the inherent imbalance of a polarised world.
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Especially since the outbreak of the Russia-Ukraine war in 2022, the global geopolitical landscape is undergoing dramatic changes. Another main source of conflict are the increasing disputes between China and the United States of America. The increasing tensions are having a massive impact on all sectors of the economy.
The shifting of the political landscape is considered to be one of the major risks that the (re)insurance industry has to deal with. Looking at other emerging risks, it is striking that there are a lot of interconnectivities between these risks and the threats resulting from shifting political landscapes. The main ones to mention here are:
- Resource management (insecurity in the supply of water, food and energy)
- Supply chain risks
- Organised crime and terrorism (by state actors)
- Cyber-crime (by state actors)
- Environmental risks
- Critical infrastructure disruptions
By themselves, the mentioned emerging risks can be regarded as accumulation risks or even systemic risks.
The consequences for the (re)insurance industry are manifold:
- When considering possible loss scenarios resulting from the increasingly challenging geopolitical situation, it is important not to ignore any political influence or pressure on the insurance industry alongside the coverage obligations knowingly entered into, especially also in combination with supposedly excluded perils and risks, such as war. Example here is the coverage of transport risks in the context of the Ukraine war. Even in the case of comprehensive strategic risk management and supposedly bullet-proof exclusionary language, it cannot be ruled out that insurers and reinsurers will continue to be pressured at all levels (political, judicial and regulatory) to make payments for the good of society that they would not actually be obliged to make.
- Increasing protectionism and rising nationalism are leading to more and more regulation and restrictions on international trade with repercussions to the (re)insurance industry.
- National and international sanctions, which vary in stringency and interpretation, make it difficult to act correctly on the (re)insurance side. Deviations in the sanction’s regime of the EU from the sanctions practice of the US are always of particular importance.
- Both insurers and reinsurers are acting much more cautiously and risk-averse with regard to the coverage of specific exposures like war risks. The enforcement of corresponding exclusions could lead to certain perils no longer being insurable or only insurable to a limited extent because the necessary capacity is simply lacking. This could lead to the need for state intervention in the form of the formation of further state-sponsored pools or an expansion of existing ones for extreme scenarios.
- It is not only the current wars and latent conflicts in the world that will present the insurance and reinsurance industries with further major challenges in the future. The social and socio-economic tensions and conflicts that have already been observed in many countries over a longer period of time were even exacerbated in recent years. All these developments have already led and will in all likelihood continue to lead to a higher frequency of major civil unrest loss events in the future, which are generally covered by strikes, riots and civil commotion (SRCC) policies.
More than ever, it is essential to proactively address a wide range of extreme scenarios and systemic risks and to pursue the question of how the (re)insurance industry intends to counter them. Careful analyses and strategic risk management decisions must be made to protect companies from the next "black swan" event, as well as from scenarios that have previously been considered rather theoretical.