The latest Insurance Risk Monitor from Broadstone, a consultancy in insurance, investments, employee benefits, and pensions, delves into elevated geopolitical risks and their implications for insurers.
This decade is proving unprecedented, Broadstone said. As the world began to recover from the COVID-19 pandemic, Europe witnessed its first armed conflict since the Second World War with the war in Ukraine, while the Gaza conflict threatens to escalate regionally. Additionally, alliances are forming among autocratic nations, and long-standing democracies are facing internal challenges, almost to the brink of collapse.
The Federal Reserve’s April 2024 Financial Stability Report highlights the escalation of geopolitical tensions as a primary near-term threat to the financial system. It warns that these tensions could stifle economic activity, drive inflation, and increase market volatility, leading to a pullback in risk-taking, a decline in asset prices, and trading losses for businesses and investors.
Insurers now face the complex challenge of predicting further geopolitical deterioration and associated costs. Key scenarios to consider include:
The potential global economic impacts from these scenarios could involve:
These economic disruptions would, in turn, affect the insurance industry through:
To navigate these risks, insurers should conduct scenario analyses, consulting external experts like political and security analysts. Actuarial techniques can translate these subjective insights into comprehensive probability distributions to estimate potential losses for each scenario. Combining scenarios, possibly through a correlation matrix approach, can provide an aggregated risk view.
Key areas that benefit from better quantification of geopolitical risks include ORSA (Own Risk and Solvency Assessment), business planning, reserving, pricing, capital modelling, exposure and aggregate management, model validation, reinsurance purchase, and underwriting. These insights can also ensure that the insurer’s Solvency Capital Requirement calculations remain relevant in the current risk climate.
“The volatile geopolitical landscape at present is of huge global concern – especially the conflicts in Ukraine and the Middle East, which have been going on for a long period already. The potential deterioration between US and China relations also remains a significant risk,” said Bharat Raj, head of London Markets at Broadstone’s insurance, regulatory and risk division.
“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.”
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