How are geopolitical dangers impacting reinsurance?

With half the world’s inhabitants going to the polls in 2024, geopolitical threat and its affect on the stability sheet of reinsurers and insurers has hardly ever felt extra related. Throughout a panel on ‘geopolitical insights & insurance coverage dynamics’ on the latest Bermuda Threat Summit, specialists from throughout the market gathered collectively to debate the best way to formulate resilient methods to account for this publicity.

Kevin Kajiwara, co-president, political threat advisory at Teneo, highlighted the presence of two “scorching wars” in Ukraine and Gaza. Given the complexity of every particular person threat issue, he mentioned, it’s important to contextualize them within the context of the present geopolitical threat surroundings.

Previous efficiency is not any indicator of future returns for the re/insurance coverage market as we speak, he mentioned, not least as a result of every of those threat elements continues to be in flux, and the vary of potential outcomes stays fairly extensive. With that in thoughts, consciousness and situation planning are going to be completely important to efficiently managing geopolitical threat.

How geopolitical threat is impacting underwriting

Providing insights into how these geopolitical dangers are having an affect on underwriting, Mark Wheeler, co-founder and co-CEO of Mosaic Insurance coverage, shared that there are two components to the challenges being confronted by the market – the primary being ‘what’s an occasion?’, whereas the second is, ‘what’s the perimeter of an occasion?’. What’s unfolding within the Center East presents a transparent instance of territorial contagion, he mentioned, because the battle between Israel and Palestine is being prolonged by proxies.

Understanding the best way to quantify these kinds of contagion and systemic dangers is likely one of the ‘Holy Grails’ of political science, mentioned Kajiwara, and it’s one thing that’s been tried and which has failed many instances.

One of many causes for that, in contrast to with financial occasions the place you might have ‘apples-to-apples’ comparability on GDP and inflation and common periodicity, is these occasions are very troublesome to measure, he mentioned, significantly within the present surroundings the place swiftly you’re having once-in-100-year occasions each single yr. It’s additional sophisticated by the truth that the identical dangers dealing with re/insurance coverage firms are being grappled with by the boards and management groups of main industrial firms, every of which is confronted with making selections on very imperfect info.

What’s taking place available in the market as we speak merely hasn’t occurred in the identical method earlier than, he mentioned, which is what makes it extremely difficult to quantify – however that’s the problem being taken up by him, his colleagues and plenty of others from the advisory sphere.

Appreciating the complete interconnectivity of the present threat surroundings

For Chintan Shah, international head, entrance workplace & treasury threat at Bloomberg, all of it comes again to the interconnectivity of the danger surroundings and understanding second-order impacts.

As an example, Shah mentioned, contemplate the implications of a significant shift in local weather coverage within the US, the EU or China. Proper now, you might have a scenario the place inexperienced property are priced at a sure degree, given ESG strategies. A significant shift in coverage would result in a repricing in these property, begging the query, has this been correctly accounted for and the way can this be performed?

One other instance can be the decoupling of commerce between two of the most important economies on this planet – the US and China – and its uneven affect on property. For instance, contemplate its affect on the garment business and its provide chain versus the electronics business and its provide chain, ought to important commerce boundaries be established.

“We’ve to have all these property in a single single view – each property and liabilities – so as to have the ability to perceive the whole publicity of threat in [terms of both] first and second order results,” he mentioned. “I feel that within the insurance coverage business, as we interact with a variety of members in my job, I feel that there’s a degree of preparedness that’s missing, that might be improved.

“As a result of if solely a few of the dangers [we’re talking about] really occur, you’re going to have second and third-order impacts rippling throughout the stability sheet on each property and liabilities.”