Briefing: Addressing emerging geopolitical risks is ‘major growth opportunity for insurers’

By Editor Katie Scott

A new report unveiled by Lloyd’s of London this week believes that emerging geopolitical risks pose “a major growth opportunity for insurers” if they seek to address the “significant protection gap” across this particular genre of risk.

Although the report, titled Shifting powers: meeting the challenges of the geopolitical landscape, focuses on the way the insurer’s role has to evolve to create solutions for new risk vectors, I feel the trends could just as easily be applied to brokers looking for new opportunities too – especially with appointed representative arrangements on the up and brokers having a key role to play in educating clients around underinsurance.

As the risk landscape develops and transforms, the onus is surely on insurers to work collaboratively with intermediaries – such as brokers and risk managers – to define and offer relevant covers for global businesses.

According to the report, published in conjunction with the University of Cambridge’s Centre for Risk Studies, there “is a significant geopolitical protection gap, which leaves vital supply chains, smaller businesses and emerging economies highly exposed to disruption from geopolitical risks”.

In turn, this means “the challenges of the geopolitical risk landscape may lead to a transformation in the relationship between insurers and risk professionals, in fostering improved data stewardship and threat monitoring across high-risk areas”.

Innovation ahead

The report starts by identifying the top 10 emerging geopolitical risk themes that the insurance industry needs to be aware of. These are:

1. The impact of Covid-19 on geopolitical relationships.

2. Greater power rivalry.

3. Localism versus globalism.

4. Multinationals at risk.

5. Terrorism and armed conflict.

6. Cyber, technology and the new tech arms race.

7. Social discontent and local conflicts.

8. Political change.

9. Politics versus economics of climate change.

10. Migration and demographics.

Describing these topic areas as delivering a “paradigm shift” for the geopolitical risk landscape, the report explained that these emerging themes present “a host of new challenges to our customers, which the insurance industry can support”.

It continued: “As the business world recovers from the impacts of Covid-19, risk professionals will seek new and more expansive solutions to protect business interests from increasing trade tensions, currency volatility, increased social unrest and other geopolitical perils. Further innovation will be needed.”

Updated job description

To achieve the required product innovation pinpointed by Lloyd’s requires insurers to look at current geopolitical risk covers with fresh eyes.

According to the report, this “may involve defining products and services that protect corporate earnings across a wider range of potential harms and externalities rather than indemnifying a narrow range of perils and loss causes that are tied to historical origins of property protection.

“However, we will still need a list of identified and covered perils that are sudden and accidental – since these are the essence of insurable risks.

“It may mean creating closer risk partnerships with their policyholders, acting as risk advisors, preparedness planners and crisis managers, in addition to providing financial compensation after a loss event.”

This kind of work definitely needs collaboration and I feel this is where brokers have a vital role to play in helping to inform decision-making around product tweaks.

The report continued: “Given the increasing turbulence of the general risk landscape and the demand for more bespoke coverages and underwriting agreements, the insurance industry itself must be prepared to innovate in the way that it provides services.

“The industry itself has access to a huge variety of data and curates fruitful relationships with risk analysts and experts to underpin its own strategies in product design and availability.”

Some innovation is already underway, however, thanks to the Lloyd’s Lab programme. For example, startups Moonshot and Verisk Maplecroft are working to harness artificial intelligence and new sources of data to better understand geopolitical threats.

Speaking on the report, Bruce Carnegie Brown, chairman of Lloyd’s, said: “The geopolitical landscape is more complex, intricate and interconnected than ever before.

“Lloyd’s has a unique role as a hub of risk expertise and innovation and we are delighted to have partnered with the University of Cambridge’s Centre for Risk Studies to identify ways we can help businesses manage these geopolitical challenges.

“Lloyd’s - and the wider insurance industry - can play a central role in addressing geopolitical risk and in doing so create a safer, more sustainable world.”

Andrew Coburn, chief scientist at the University of Cambridge’s Centre for Risk Studies, added: “The changing nature of geopolitics poses a significant challenge to an industry traditionally associated with protecting physical assets.

“Insurers must innovate to safeguard the dependencies and complex operational practices which underpin global commerce from a host of geopolitical risks as they intersect with technology, public opinion, climate change and other factors.

“We are delighted to contribute to this thought leadership promoting ambitious and necessary changes within the industry which will help to safeguard us all.”