With half the world’s inhabitants going to the polls in 2024, geopolitical danger and its impression on the steadiness sheet of reinsurers and insurers has not often felt extra related. Throughout a panel on ‘geopolitical insights & insurance coverage dynamics’ on the latest Bermuda Danger Summit, specialists from throughout the market gathered collectively to debate formulate resilient methods to account for this publicity.

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

Previous efficiency isn’t any indicator of future returns for the re/insurance coverage market right this moment, he stated, not least as a result of every of those danger components remains to be in flux, and the vary of potential outcomes stays fairly huge. With that in thoughts, consciousness and situation planning are going to be completely important to efficiently managing geopolitical danger.

How geopolitical danger is impacting underwriting

Providing insights into how these geopolitical dangers are having an impression on underwriting, Mark Wheeler, co-founder and co-CEO of Mosaic Insurance coverage, shared that there are two parts 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 provides a transparent instance of territorial contagion, he stated, because the battle between Israel and Palestine is being prolonged by means of proxies.

Understanding quantify some of these contagion and systemic dangers is likely one of the ‘Holy Grails’ of political science, stated Kajiwara, and it’s one thing that’s been tried and which has failed many occasions.

One of many causes for that, not like 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 stated, notably within the present setting the place unexpectedly 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 corporations are being grappled with by the boards and management groups of main industrial corporations, every of which is confronted with making choices on very imperfect data.

What’s taking place available in the market right this moment merely hasn’t occurred in the identical approach earlier than, he stated, 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 danger setting

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

As an illustration, Shah stated, think about the implications of a serious shift in local weather coverage within the US, the EU or China. Proper now, you might have a state of affairs 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 could be the decoupling of commerce between two of the biggest economies on the planet – the US and China – and its uneven impression on property. For instance, think about its impression on the garment trade and its provide chain versus the electronics trade and its provide chain, ought to important commerce limitations be established.

“Now we have to have all these property in a single single view – each property and liabilities – so as to have the ability to perceive the entire publicity of danger in [terms of both] first and second order results,” he stated. “I believe that within the insurance coverage trade, as we have interaction with plenty of members in my job, I believe that there’s a degree of preparedness that’s missing, that could possibly be improved.

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