Heightened geopolitical tensions pose risks to insurance sector – Broadstone

The insurance sector must focus on and prepare for the risks it faces due to amplified geopolitical tensions across the globe.

That was according to consultancy Broadstone, which published its latest Insurance Risk Monitor report earlier this week (26 June 2024).

The firm told Insurance Times that insurers must assess the likelihood of further risks arising from heightened geopolitical tensions and said that this risk type was potentially the largest driver of tail risk in the current environment.

Potential future flashpoints could include the escalation of the conflicts in Ukraine and Gaza, worsening relations between the United States and China, a civil war in the US, a “disorderly dissolution” of the European Union, an invasion of Taiwan, a conflict between North and South Korea or a significant cyber attack and banking system failure.

As a result, the firm warned that the industry could begin to see global economic slowdown, high market volatility and disruption to global supply chains and energy markets, which could in turn lead to loss in business volumes across all classes of business, high inflation and investment and operational losses.

And it added that insurers could no longer avoid the need to explicitly quantify geopolitical risks in their pricing, modelling and risk management processes.

Bharat Raj, head of London markets at Broadstone, said: “These are fast moving situations with potential consequences that reach far beyond their borders and present a threat to economies across the world.

“Although direct losses from these events may be limited, for example through exclusions, insurers should not underestimate the potential knock-on impact on their businesses, which is likely to be material across all classes of business.”

Positives

Broadstone’s Insurance Risk Monitor report also highlighted that, to mitigate risks from geopolitical tensions, insurers should consider conducting scenario analysis and think about bringing in experts outside the insurance industry for consultations.

The firm also suggested that insurers use actuarial techniques to transform the estimates from these discussions into “holistic” probability distributions and determine a range of potential losses for each scenario.

Additionally, the scenarios could be combined to provide an aggregate risk value.

Key areas benefiting from improved quantification of geopolitical risks include the own risk and solvency assessment, pricing, reserving, capital modelling, reinsurance purchasing, business planning and underwriting, said Broadstone.