Vol 46: Issue 3 | September 2023
Reinsurers are well aware of some of the most obvious geopolitical risks, such as the Russia–Ukraine war, that are impacting business more broadly, and insurance and reinsurance in particular.
However, these risks are far from static. Political tensions, economic instability and even climate change can interact and lead to emerging geopolitical risks.
A great example of this has been highlighted by Swiss Re. An emerging risk it calls the “Arctic opening” is an environmental risk that could have geopolitical implications. With the Arctic region experiencing accelerated warming, the ice is melting and new shipping routes are opening up.
But with this economic activity comes the growing potential for environmental exposure and geopolitical frictions, Swiss Re observes in its recently released SONAR 2023 report on emerging global risks.
“Co-operation among the eight member states of the Arctic Council has been suspended, fostering governance, regulatory and legal uncertainties,” says the report.
“The prospect of military conflict in the region has increased, changing the risk landscape for entities active in the region and their insurers.”
The impact of the Artic opening creates varied risks, which Swiss Re rates as high on its scale. Melting permafrost could impact property insurance losses, and pollution could trigger casualty insurance policy claims. Pathogens currently frozen in ice could be released and be the source of new pandemics.
The Swiss Re report shows how geopolitical risk is linked to the environment, and how upheavals in climate could impact trade and relationships between nations.
The eight nations in the Arctic Council are Russia, the United States, Canada, Denmark, Norway, Iceland, Finland and Sweden. When Russia invaded Ukraine in early 2022, the seven other members suspended the council’s activities.
“Russia sees Arctic ice melting as a defence threat,” says the SONAR report. “Many nations have military presence and infrastructures in the region and some are ramping up capacities, with Russia’s invasion of Ukraine having raised the risk of conflict in the region.”
As well as the Arctic opening, SONAR identifies the dangers of nuclear radiation release as another major environmental risk with geopolitical implications, noting that war is an increasing source of potential damage. This is rated as a medium risk.
“Geopolitical polarisation continues, wars are ongoing and threats of nuclear events have become daily news,” says Patrick Raaflaub, group chief risk officer at Swiss Re. “Such concerns remind us of a world we thought long gone with the demise of the Cold War.”
In addition to the ever-present danger of nuclear accidents as a result of the Ukraine war, and even the use of nuclear weapons, the report identifies “rogue nations” North Korea and Iran as other geopolitical threats.
“North Korea is a nuclear power and regularly test-launches ballistic missiles, and it is widely assumed that Iran is pursuing nuclear armament,” says the report. “Outside of the context of tension and war, nuclear systems can be targets of international sabotage by a range of non-state hostile parties, such as cybercrime gangs and terrorist organisations.”
East vs West
Global asset manager BlackRock is also focused on geopolitical risk, and recently updated its Geopolitical Risk Dashboard to reflect “a new world order”.
“Two major geopolitical and economic blocs — one Western-led and one led by China and Russia — are firming up and are increasingly in competition with each other,” according to the report from the BlackRock Investment Institute. “The fragmentation that’s ensued has led to a dramatic reduction in geopolitical co-operation.”
BlackRock has a Geopolitical Risk Indicator score that tracks the relative frequency of brokerage reports and financial news stories associated with specific geopolitical risks, adjusted on whether the sentiment is negative or positive.
The indicator was at 0.73 in March 2020 when the World Health Organization declared the COVID-19 pandemic, and at 1.0 in April 2022 — just weeks after Russia invaded Ukraine.
The indicator has since subsided to zero, but BlackRock identifies three key risks that are still rated as high.
Finding opportunity in crisis
Despite these concerns, Marsh Specialty is more upbeat. The firm says that while the geopolitical and economic risk landscape is elevated, the downside from potential disruption is balanced out with global growth opportunities for reinsurers, and these opportunities outweigh the risks.
Marsh Specialty’s 2023 Political Risk Report says that political instability, especially when compounded by the impact of inflation, threatens the investment environment and in some cases even the social structure of emerging markets.
The amplifying effect of related risks — dubbed ‘polycrises’ — have turned the focus of nations inward on economic security, which often comes at the expense of free trade. The report says that decisions by key economic powers on issues ranging from fertilisers and microchips to energy transition will continue to have repercussions on a global scale.
Nick Robson, global head of Credit Specialties at Marsh, says this scenario might be “unnerving”, but there are still many opportunities. “If risks are identified, managed and mitigated effectively,” he says, “the prospects for short-, medium- and long-term growth frequently outweigh the risks presented by short-term volatility.”
Three risks rated as high
BlackRock’s Geopolitical Risk Indicator score still rates the following geopolitical risks as high.
1 US–China strategic competition
“We see the trajectory of US–China relations as decidedly negative and believe it presents significant risks for investors,” says BlackRock.
2 Conflict between Russia and NATO
“We see no resolution on the horizon as Russia and Ukraine both pursue spring offensives,” says the report. “We see a substantial risk of escalation in the most dangerous standoff between the West and Russia since the Cuban Missile Crisis.”
For reinsurers, this suggests that international trade will continue to be negatively impacted with knock-on effects for businesses globally, including insurance operations such as accessing spare parts and materials for repairs, as part of claims. This could delay the resolution of claims, as well as the options available to claims teams.
Volatility can also mean higher costs for reinsurance, with some hard decisions for insurers as they decide on their priorities. Chubb, for example, recently renewed its catastrophe insurance for North America but has less reinsurance available for 2023, meaning that more losses are likely to be retained.
3 Tension in the Persian Gulf
BlackRock says Iran’s nuclear program has negated the positive influence of the potential resumption of diplomatic relations between Saudi Arabia and Iran.
“Concerns over Iran’s nuclear program have raised the risk of a military confrontation in the Middle East to its highest level in nearly a decade,” the report states.
Rated as medium risks are a major terror attack, a political crisis in emerging markets as a result of the ripple effect of the Ukraine war, and a conflict involving North Korea. The report also analyses 68 geopolitical events since 1962 and notes a significant change in their impact.
Historically, BlackRock says, these events have had a short-lived impact on markets and economies but this has changed. “We now see geopolitics as structural market risks, with direct and long-lasting effects.”
Source: BlackRock Geopolitical Risk Dashboard, Market Movement.
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