When asked about the biggest risks that the insurance industry needs to deal with, many in the sector will point to issues such as climate change. Its effects, through less predictable and more destructive weather events, are already being keenly felt in the property and casualty market.

This will undoubtedly be of huge importance to the industry for decades to come. However, over a shorter horizon, such as five years, geopolitical risk has arguably been overlooked as something that is going to demand ever more of the industry’s attention. The risk landscape is rapidly developing and reinsurers’ withdrawal from the market means that accessing coverage will become increasingly difficult.

Drivers of geopolitical tension

Growing geopolitical tension was predicted by many to be one of the major themes of 2024, in part, driven by the huge number of elections taking place worldwide. A third of Africa has held national elections, with South Africa’s General Election held on 29 May. Elections are also due to be held in nations where there is armed conflict, and so there is potential for tensions to become further inflamed.

Even beyond 2024, however, the most important drivers of geopolitical tension – the war in Ukraine, conflict in the Middle East and China-US relations – are likely to remain important factors in the market beyond the close of the year, shaping how underwriters assess their risk appetite.

The risk landscape is changing rapidly

In an environment where political risk is rising, the industry is facing higher insured losses. Civil unrest has been seen across the world in recent years, including in South Africa. For many, it has heightened the perception that risk is growing, and reinsurers have responded by withdrawing from the market. As conditions harden, insurers are having to pass higher reinsurance costs onto their customers. This cycle looks unlikely to be broken over the next five years.

Insurers’ sense of growing risk is not helped by the fact that the risk landscape is changing rapidly. The development of cyber terrorism, and the use of state-sponsored cyber-attacks, is something that the industry is having to get to grips with quickly. This has become more important as cyber-attacks are increasingly likely to produce physical damage.

The widening ambit of damage resulting from political violence has meant that insurers are reviewing terms and conditions and becoming more selective in what they will insure – many now refuse to cover NBCR (nuclear, biological, chemical, radiological) attacks. They are also limiting capacity for those regions they consider most exposed. In this context, the role played by brokers becomes more difficult but much more important, ensuring that clients get the coverage they need at a price they can afford.

National governments have also stepped in to ameliorate the situation. Many have established state-backed terrorism risk insurance pools or a government backstop for insured losses. In France, the Gestion de l’Assurance et de la Réassurance des Risques d’Attentats et Terrorisme (GAREAT) acts as a pool of insurers, with 70 insurers and reinsurers mandated to participate. In the US, the Terrorism Risk Insurance Program (TRIP) provides a federal backstop and encourages more capacity to be made available.

While these schemes can help, they cannot eliminate the struggle to access capacity. Moreover, they are not a solution to worldwide instability; in many of the countries where political violence risk is at its highest, no such equivalent scheme exists.

Navigating the market effectively

Brokers will, therefore, continue to play a vital role in helping companies to navigate the market effectively. They should work closely with clients to help them develop a thorough understanding of their exposure and coverage needs. Most importantly, they will need to leverage their knowledge and contacts to unlock capacity in a constrained market.

You can read the original article on the FA News website