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Geopolitics and Insurance Sector
Context:
In the 2020s, international trade has been deeply impacted by a complex web of known risks, such as geopolitically motivated conflicts and sanctions, and emerging threats, including generative artificial intelligence and cybersecurity issues.
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- These challenges have driven up insurance premiums across industries globally, as insurers grapple with the unpredictable nature of these risks.
- Evaluating and pricing risks—especially those stemming from geopolitical and geoeconomic upheavals like the Middle East conflict, Russia’s actions in Ukraine, and reciprocal sanctions—has become increasingly difficult.
Role of Governments
- Against this backdrop, national governments can play a pivotal role as ultimate insurers for domestic companies operating in global markets.
- A feasible starting point is government-backed public-private insurance initiatives, particularly across key economic connectivity corridors.
- Such corridors—like the India-Middle East-Europe Economic Corridor (IMEC), the International North-South Transport Corridor (INSTC), the Middle Corridor, and the Lobito Corridor under the Partnership for Global Infrastructure and Investment (PGI)—traverse politically unstable regions, from the Red Sea to Central Africa and the South Caucasus.
- To ensure these trade routes remain viable, partners must securitise them both militarily and financially.
Geopolitics and the Insurance Industry
- Disrupted Economic Order: The past few years have disrupted the global economic order that relied on low inflation, cheap labor, and stable supply chains—a legacy of post-1945 globalisation.
- Shocks: Shocks like the pandemic, Russia’s aggression in Ukraine, and the Red Sea supply chain crisis have fueled inflation and triggered interest rate hikes worldwide.
- Elections: Elections in 2024 across 64 nations, including the United States and European Union, add further layers of uncertainty.
- Insurance Sector: This reset in the geopolitical and economic landscape has placed immense pressure on the insurance sector.
- Traditionally, insurers aim to provide relief against occasional commercial risks rather than address structural disruptions like geopolitical conflicts or sanctions.
- Insurance premiums are determined by three main principles: accessibility (quantifying profits, losses, and payouts), randomness (events must be unpredictable and uncontrollable), and mutuality (diversifying risks across stakeholders).
- Geopolitical shocks, however, often fail to meet these criteria, as their impacts are highly targeted, difficult to predict, and lack broad risk-sharing mechanisms.
- Consequently, insurers have resorted to increasing premiums across industries.
- For instance, Houthi militancy in the Red Sea has raised freight insurance premiums since October 2023, forcing exporters to consider alternative routes like the Cape of Good Hope, which adds 30 days and USD 1 million in transportation costs.
- Such increases are reflected across the board: global insurance premiums have risen by 10% annually over the past four years, with political risk premiums growing by 13% and maritime insurance premiums by 20%.
- Consequently, insurers have resorted to increasing premiums across industries.
- War risk insurance premiums alone have surged from 0.05% to 1% of a vessel’s insured value.
Embedding Government-Backed Insurance in Economic Corridors
- The rising complexity of risks in regions like the Middle East, Europe, and Africa highlights the need for innovative solutions.
- Economic corridors such as the IMEC, INSTC, Middle Corridor, and the European Global Gateway are vital pathways for trade but are also vulnerable to war, political instability, and non-state militancy.
- For governments to encourage private sector participation in these corridors, securing these routes and establishing intergovernmental insurance frameworks for political and geopolitical risks are essential.
- Government intervention is justified by the volatility and randomness of collateral damage from geopolitical conflicts. Models for such intervention already exist.
- For example, the US International Development Finance Corporation insures up to USD 1 billion for private investments in 49 countries.
- Similarly, the UK’s Pool Re program, a public-private partnership established after IRA attacks in the 1990s, offers extensive political risk insurance with government-backed financial security.
- China provides another example through its Belt and Road Initiative (BRI).
- A promising approach is the creation of corridor-specific insurance vehicles, akin to the World Bank Group’s Multilateral Investment Guarantee Agency, which insures against non-commercial risks in developing nations.
Conclusion
As governments increasingly prioritise economic corridors as strategic assets, embedding insurance frameworks to address geopolitical risks will not only secure trade but also pave the way for resilient global economic cooperation.
