The wars in Ukraine and Gaza (and the possibility that these will spread wider) as well as the growing tension between China and Taiwan (and the US) are creating increased levels of geopolitical risk. Higher levels of global geopolitical risk (whether real or perceived) lead to a decline in economic activity, rapidly depressed stock markets and reduced investor confidence, particularly in emerging economies, with capital flowing back to safe havens.

Recent global tensions have caused significant increases in the cost of energy, materials and labour and escalated inflation and interest rates, generating a significant elevation in company insolvencies. Insolvencies in England and Wales have recently reached levels not seen since 2009, with the highest levels (18%) in the construction sector, traditionally a driver of high value, complex insurance claims.

Geopolitical tensions are also increasing regulatory scrutiny, with sanctions and financial crime regimes being reinforced in the UK, EU and US, causing additional legal and compliance risks for companies, including in relation to economic crime, cyber security and reputation management. The recent UK 2024 Financial Services Risk and Resilience Outlook rated geopolitical risk as the number one risk for the UK financial sector.

These heightened geopolitical risks come at a time when there is still a significant amount of private equity flowing into the insurance market, resulting in an increase in the number of new market entrants willing to offer very competitive terms. In the D&O market there has been a lot of commentary from traditional insurers about whether unsustainable pricing in 2022 and 2023 is storing up a long tail of inadequately priced exposure, particularly given the known impact that economic uncertainty and higher inflation has on the frequency and severity of claims.

Insurers are better placed than most to understand the cyclical impact of geopolitical risks and how the current climate compares to other turbulent periods in contemporary history. It is all the more important that insurers and the companies they insure, prioritise these emerging risks and respond proactively to the challenges and opportunities that they bring.

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