Decades after the end of the Cold War, the events of 9/11 and the Global Financial Crisis 2008, there is the perception that we are now again an inflection point where uncertainty and instability are reaching new heights. Essentially, an emerging risk is characterised by a high degree of uncertainty. The uncertainties arising from geopolitical risks are currently some of the most crucial emerging risks challenging the global (re)insurance industry.
Geopolitics is the study of how factors such as geography, economics, and demographic trends interact to shape the domestic and foreign policy of individual states as well as the wider international relations. Within the (re)insurance industry, the term ‘risk’ usually refers to the likelihood of loss or the perils which may impinge on the subject matter of (re)insurance. Geopolitical risk in (re)insurance is, therefore, the risk of a financial loss resulting from geopolitical dynamics in world politics. It may be understood as the potential that international politics negatively affect commercial operations across international borders. This would include related adverse effects on the commercial value chain, leading to lost revenues and business opportunities.
Non-life reinsurance is essentially risk-sharing business across borders, one that is always changing to adapt to new conditions. Contemporary regulatory, political and economic developments are having profound impacts on the wider (re)insurance industry. Risk carriers and intermediaries play a vital role in helping mature and less developed economies protect vulnerable people and valuable assets.
Risk carriers and brokers are well-advised to manage geopolitical risks, i.e. identify, analyse and economically control those risks. Geopolitical risk can threaten their assets or earning capacity and negatively affect any commercial activities. There is the realistic possibility that geopolitical tensions will continue to increase and even localised conflicts to flare up which will make the management of geopolitical risks more challenging.
Worldwide, losses resulting from geopolitical risks are rising which increases the material cost of doing business across different markets. Among key business threats are escalating sanctions policies introduced by states, crises in emerging markets and the spectre of a global economic recession. Protectionism and trade restrictions are increasing as the result of trade wars which affect the wider international political economy.
The dissolution of the post-Cold War international order results in the weakening of liberal and democratic values, the erosion of established international norms and practices. With the re-emergence of international rivalry, there is the risk that multilateral institutions and global governance become irrelevant as states fall back on unilateral behaviour in the pursuit of national interests. Global businesses are critically exposed to the possibility of volatile financial markets and the increasing irrelevance of long-established legal rules governing international trade and capital flows.
(Re)insurers and brokers should keep track of geopolitical trends and adapt their business strategies to adequately manage emerging risks. A potential way forward may be industry-wide collaborative efforts to asses and mitigate new emerging risks as well as share information and data for the mutual benefit of all stakeholders involved. This endeavour may even contribute to a future stabilisation of the currently unbalanced global economic system and international relations.
Lloyd’s of London defines an emerging risk as “an issue that is perceived to be potentially significant, but which may not be fully understood or allowed for in insurance terms and conditions, pricing, reserving or capital setting”.