Maroc - EURASIAREVIEW.COM - A la une - 15/12/2024 00:20

Navigating Geopolitical Threats In The Insurance Sector – Analysis

By Prithvi Gupta Since the turn of this decade, heightened known risks (geopolitically-motivated conflicts and geoeconomically-motivated sanctions) and emerging unknown risks (generative artificial intelligence and cybersecurity threats, among others) have exacerbated insurance premiums across the board for all industries in the international economy. The unpredictable nature of these known and unknown risks has made it difficult for insurers to evaluate risk levels and their scope, especially geopolitical and geoeconomic threats such as the ripple effects of the Middle East conflict, Russia’s special military operation in Ukraine and reciprocal economic sanctions by the West against Russia and China. In these geopolitically turbulent times, wherein economic engagement and supply chains are being weaponised as instruments to exert geopolitical influence, a case can be made for the national government to step in and act as an ultimate insurer for the international trade of domestic private companies operating abroad. An initial step in this regard can be government-backed public-private insurance across government-coordinated economic connectivity corridors—a feature of the emerging role of geopolitics in global trade and supply chains. Intergovernmental economic corridors such as the India-Middle East-Europe Economic Corridor (IMEC), the International North-South Transport Corridor (INSTC), the Middle Corridor, and the Partnership for Global Infrastructure and Investment (PGI) Lobito Corridor are government-backed corridors that traverse through high-risk conflict zones such as the Red Sea, politically unstable and conflict-ridden Central Africa, and the South Caucasus. Corridor partners need to securitise these geoeconomic trade routes, both militarily and financially. This article provides suggestions for how governments can coordinate action in economic connectivity corridors to ensure these routes against geopolitical threats and geoeconomic aggression for efficiency in trade. It also analyses the role of geopolitically motivated conflicts in the rising insurance premium rates in the political risk, freight and maritime trade domains. Geopolitics and insurance The turn of this decade witnessed the demise of a long-held consensus around low inflation and low-cost labour and capital—products of the post-1945 globalisation era—due to a series of shocks to the global economy (Russia’s aggression in Ukraine, the Red Sea supply chain crisis and the pandemic) which culminated in widespread inflation and interest rate hikes across the developed economies and most of the emerging markets in developing countries. Elections across 64 nations (and the European Union) in 2024 add to the geopolitical and economic uncertainties because of the associated risks of policy upheavals in these countries, especially the United States (US). These developments gave way to a reset in the global geopolitical and economic matrix. Economic policy uncertainties and geopolitically motivated supply chain disruptions also built pressure on the insurance industry, which is designed to only occasionally provide relief to commercial activity through monetary measures, rather than deal with structural problems such as geopolitical conflicts and economic sanctions. Insurers and reinsurers determine insurance premiums and their profitability based on accessibility (quantifiability of profits, losses and payouts), randomness (unpredictability of the insured event whose occurrence should not be in the insurer/customer’s control)  and mutuality (involvement of multiple stakeholders to diversify risks outcomes). Often, direct and indirect damage from geopolitical shocks cannot be assessed, predicted or shared with other stakeholders, as geopolitically motivated damage is precisely targeted. As a result of the global insurance industry’s incapacity to effectively assuage these new problems, most insurers and reinsurers have resorted to ballooning insurance premiums across various industries and economic sectors. Besides, premiums rise with higher risk perception. The Houthi rebels’ militancy in the Red Sea increasedthe insurance premiums on freights, beginning October 2023. The alternative route—the Cape of Good Hope—adds 30 days of transit and US$ 1 million in excess transportation charges. This poses a problem for Asian exporters. In fact, Indian exports to the US and EU declined in the second and third quarters of 2023-24 as exporters were holding back their exportables due to this risk premium posing extra costs. The IMEC, INSTC, Middle Corridor, and PGI are essentially responses to this, that avoid the extra risk premium and transportation costs of the extra mile movements, which are also associated with higher insurance premiums. In the past four years, global insurance premiums have risen by 10 percent annually. Political and geopolitical risk premiums have risen by 13 percent between 2022 and 2024. Industrially, the shipping industry saw insurance premiums rise by 20 percent between 2022 and 2024. War risk insurance premiums, which were previously around 0.05 percent of the insured value of the vessel, have now increased to between 0.75 percent and 1 percent. Marine and shipping insurance statistics are essential as close to 90 percent of global trade is seaborne. Exacerbated insurance premiums in other industries such as automobiles and cyberspace are also a byproduct of geopolitical conflicts and grey-zone aggression.  Embedding governmental insurance in connectivity corridors As risks become more complex and unpredictable, insurers can no longer evaluate them through the rear-view mirror. This especially stands true in the case of the Middle East, Europe and Africa, where economic corridors like the IMEC, the INSTC, the Middle Corridor and the European Global Gateway are emerging as critical pathways for economic cooperation among like-minded partners. However, these regions/continents are also plagued by war, political instability, militancy and armed interventions by non-state actors in key trade routes. To persuade their domestic private actors to invest in and instrumentalise these corridors for international trade, the government will first have to ensure transit security across these corridors and develop intergovernmental insurance frameworks for political/geopolitical risk across these corridors. The volatility of geopolitical conflict and the randomness of the collateral damage that may be incurred therein necessitates governmental intervention. There is precedent for this in both public sector and public-private partnerships. The US International Development Finance Corporation guarantees coverage up to US$ 1 billion in 49 countries for the US private sector. Additionally, when businesses lost infrastructure and inventory in the late 1990s after a series of Irish Republican Army attacks in the United Kingdom, the UK government and the country’s private insurance sector formed the Pool Re, a private-public vehicle, wherein financial security is covered by the government. Pool Re provides wide-ranging domestic and international political risk insurance to British businesses. Similar models of governmental intervention or public-private partnerships exist in the United Arab Emirates, China, Saudi Arabia, France and Germany, among others. A major reason for the Chinese private sector’s deep involvement in the Chinese Belt and Road Initiative (BRI) is that there is massive governmental support through government insurance, tax subsidies and easy regulations and permits for investments under the BRI framework. This has led to a concentration of Chinese private outward investment in middle and low-income countries with high indices of political risk. If partner countries of the IMEC, INSTC, and other corridors wish to optimally operationalise the corridors, an intergovernmental multipurpose vehicle that insures against geopolitical risks is necessary. A corridor-specific vehicle along the lines of the World Bank Group’s Multilateral Investment Guarantee Agency, which offers insurance for non-commercial risks in the developing world, is an idea to begin with. That being said, transit security is still the bedrock of any government-backed political risk insurance, emphasising the role of national militaries in securing trade routes. Conclusion  The idea of governmental or public-private insurance for political risks is still a radical one, despite it being the need of the hour. In connectivity corridors which run through high-risk conflict areas, this need is even more tenable. Public-private or government insurance can not only alleviate some pressure from the private insurance sector, which is struggling to insure against geopolitical risks but also optimise the operationalisation of the economic corridors which are emerging as national economic priorities for many countries. Another collateral benefit of government or public-private insurance is that this allows domestic private players to go out and trade internationally, which is essential for any country with an ambition for economic growth and development.  About the author: Prithvi Gupta is a Junior Fellow at the Observer Research Foundation Source: This article was published by the Observer Research Foundation