2024 has been a year of heightened political instability. War is raging in the Middle East and Ukraine, national elections are bringing new leaders to the fore, and militants are continuing to disrupt vital maritime routes. Going into the new year, insurers are braced for a wave of economic and conflict-based risks. Isaac Hanson reports.
This year, corporates have entered what a report by broker WTW calls “the acceptance phase of political risk loss”. Many now see political risk as an inevitable part of doing business, with more than 70% of the 50 corporates surveyed in the report having experienced a political risk loss so far in 2024, and 96% adding new political risk management capabilities.
The Russian invasion of Ukraine was a major wake-up call for business, causing US$130bn in infrastructure damage in the first year alone according to World Bank data, says Zoe Towndrow, broking company BPL’s practice lead on political violence. Of that, only 1% was insured. In the two years since, tensions between the US and China have grown, and open war has returned to the Middle East.
Further threats are on the horizon. Geopolitical tension can quickly translate into economic instability, especially given the imminent Trump presidency, which threatens to isolate the US from global markets. Grey zone aggression, disruptive actions that stop short of outright war, is an increasingly prominent and insidious form of disruption likely to also pose threats not easily remedied through state responses.
Political risk insurance (PRI) is one way to hedge against these threats. Traditionally covering insureds against risks posed by government actions and political violence, such as nationalisation of assets, currency transfer restrictions and state defaults, the market is maturing and adapting to emerging risks.
“The industry is one that is coming of age,” Laura Burns, senior vice-president and political risk product leader for the Americas at WTW, tells GTR. “Not just political risk insurance, but geopolitical insurance coverage as a class is rapidly evolving and maturing.”
Against this backdrop, GTR asks brokers in the sector what they see as the biggest risks facing the trade industry in 2025 and how the insurance and reinsurance markets could respond.
Conflict risk tops agenda
By far, the most common risk identified by GTR’s sources is continued conflict and the risk of escalation. This is focused on three main regions: Russia-Ukraine, the Middle East, and China and its neighbouring countries.
For Sam Wilkin, director of political risk analytics at WTW, the Middle East could see a rapid deterioration in its risk profile and remains unpredictable.
“[The region] is substantially at risk of being overtaken by events because it’s evolving so quickly and unexpectedly,” he tells GTR, speaking in mid-October. “Most analysts did not expect that Iran would launch missiles against Israel in retaliation for the assassination of the Hamas leader in Iran and Israeli ground incursion into Lebanon.”
According to Wilkin, the worst-case scenario is that the US gets involved.
“If the US attacks targets in Iran, all the incentives change. There’s very little Lebanese Hezbollah or Iran can do to hurt the US directly, so their big incentive becomes to cause as much damage in the region as possible, including attacks on oil infrastructure and possibly port infrastructure.”
An attack on the Gulf states, particularly Saudi Arabia, UAE or Qatar, would not only lead to massive losses due to damage, but potentially also a spike in oil prices due to reduced supply from the region, Wilkin says.
This situation could have far-reaching effects on global trade, says David Evans, executive director of structured credit and political risks at Gallagher.
A significant rise in the price of oil “will have an impact on those oil-importing economies that could potentially lead to defaults down the line”, he says.
“But things could calm down; we don’t know how bad this is going to get.”
The ongoing war in Ukraine remains incredibly costly in economic and human terms. Its financial toll is already “on par with some of the most expensive natural disasters in human history”, Wilkin says.
Jake Aungier, divisional director of credit and political risks at Howden, points to the early October Russian strikes on civilian cargo ships in Odessa, southern Ukraine, as an example of the “persistent volatility” of the situation and its impact on trade.
Much of the political risk hedging in Ukraine is currently facilitated by risk-sharing agreements from development finance institutions and export credit agencies, such as Denmark’s Export and Investment Fund, the Japan Bank for International Cooperation and the European Bank for Reconstruction and Development.
In June, the US International Development Finance Corporation announced US$350mn in additional political risk insurance cover for the country, bringing the size of its Ukraine portfolio to US$1.6bn.
The other major site of geopolitical risk is in the Pacific, where US-China tensions threaten to go beyond merely export controls and tariffs.
The threat of a Chinese invasion of Taiwan remains a concern, underscored by China’s wargames around the island in October.
But WTW’s Wilkin sees the South China Sea as a more pressing risk.
“There are many territorial disputes, involving many parties and lots of civilians,” he says. “That creates an element of unpredictability; if it’s military to military, you can keep control of what happens, but if you have lots of civilians involved, actors may make decisions without considering the consequences for escalation.”
Seven countries in East and Southeast Asia are involved in various territorial disputes in the South China Sea, and China is by far the strongest. In recent months, tensions between the Philippines – with which the US has a mutual defence treaty – and China over the region have grown, with reports of physical violence breaking out between the coastguards of the two nations.
More broadly, the geopolitical division between the US and China is having ongoing detrimental effects on companies that operate in both regions.
“It’s dividing sectors,” says Wilkin. “There is a western ecosystem and an eastern ecosystem developing, and it is really hard for companies that are used to being everywhere to adjust to a new reality where they have to be on one side or the other.
“In the energy market, for instance, there’s a whole trading bloc inadvertently created by sanctions [following Russia’s invasion of Ukraine] where western companies can no longer really operate. Geopolitics is no longer just a risk of loss; it’s impacting corporate strategy.”
A company may risk jeopardising trade with one country if it is perceived to be too closely associated with another. For instance, nine US companies had their Chinese assets frozen in September over arms sales to Taiwan, even though these arms were not produced in China.
The increased risk of governmental retaliation against US firms has had a notable effect on the price of insurance when dealing with China.
“Five or six years ago, you used to be able to get some China capacity for 50 basis points,” says WTW’s Burns. “Today it’s more like 150.”
Evans at Gallagher also notes the potential knock-on effects of poor ongoing US-China relations.
“China is extremely important in determining demand in the commodity sector, and therefore setting of prices within the commodity world as well,” he says.
“Our market is tied into covering part of that commodity space, across energy, metals and softs, and any sort of significant spikes in pricing can have a direct impact on buyers’ or suppliers’ ability to pay and/or perform. This could have an impact on credit losses down the line.”
Corporates are continuing to take out political risk insurance cover despite the increased cost.
“We saw a huge spike in interest from US companies with investments in China, particularly those outsourcing manufacturing of consumer goods,” says Rupert Morgan, executive director of structured credit and political risks at Gallagher.
“They suddenly realised they are reliant on the country for their production, as they haven’t built facilities elsewhere. We saw a knee-jerk reaction when it dawned on the American people that what happened in Ukraine could happen in Taiwan.”
However, Morgan says that the risk factors driving companies to seek PRI tend to be the same ones that make insurers wary of providing it.
“China has deteriorated in terms of risk perception,” Morgan says. “We can’t buy US$200mn of capacity to insure an American company investing in China today at prices that make any sense, whereas we could have done three or four years ago.”
Grey zone aggression
Another risk emerging in 2025, according to WTW, is grey zone aggression – a threat that is difficult to define, even harder to underwrite, but critical to recognise.
It encompasses disinformation campaigns, cyberattacks and proxy wars, all of which blur the lines between traditional conflict and peacetime operations.
“It’s been going on forever, but now it’s starting to hurt us in the West, so we’re paying attention to it,” says Wilkin. “The big advertisement for grey zone aggression is the Ukraine conflict.”
The conflict began in 2014 with Russia’s invasion of Crimea, during which Moscow denied deploying its own troops, instead claiming the armed forces in the region were local self-defence groups.
Wilkin explains that this denial, though clearly false, made it extremely difficult for the West to respond without risking a major diplomatic crisis.
While the EU and US did enact sanctions against Russia in response to the annexation of the peninsula, these measures fell far short of the near-total withdrawal of western companies from Russia following the outright invasion of 2022.
“Operating in that grey zone is very desirable for rising powers who see Western democracies as geopolitical rivals, because grey zone attacks are difficult to deter,” Wilkin says.
“The grey zone is a major problem for insurers, because what is really happening is often disguised as something else. Policies are contracts, and trying to specify the category of loss for grey zone attacks is a nightmare.”
Such risks are resulting in an expansion of risk managers’ portfolios, Wilkin adds. Geopolitics is increasingly seen as a key factor in determining economic risk beyond the traditional remits of sovereign debt defaults or governmental collapse.
“Geopolitical risk management is still outside the world of the risk manager, but it’s gradually creeping into their domain,” he says. “It impacts not only political risk insurance, but all policies.”
In response, Wilkin says risk managers are becoming more involved in policy wordings for political risk.
“This is a level of analysis that risk managers usually did not get up to. It’s cutting edge, and it’s hard to do,” he says.
Economic instability and nationalisation risks
The third major risk factor going into 2025 is that greater geopolitical instability will lead to economic insecurity, particularly in the Global South. This may lead to crises such as more sovereign debt defaults and currency shortages.
“Many economies are grappling with hyperinflation, which is leading to diminished access to hard currency,” says Aungier at Howden.
“Sovereign defaults, such as those witnessed in Ghana and Sri Lanka, have become increasingly common. This economic environment complicates local currency contracts, demanding more extensive hedging strategies and careful liquidity management due to payment delays.”
An S&P Global report released in October finds there are key early warning signs for a country heading for default, including debt repayment costs increasing faster than the global average, currency depreciation, and declining government revenue linked to volatile commodity earnings.
By comparing the situations of countries that have previously defaulted to current economic states, it forecasts a higher rate of sovereign debt defaults over the next 10 years due to the increased global cost of borrowing and a weakening of sovereigns’ creditworthiness over the past decade.
Aungier notes this could lead to losses for companies with asset investments in developing countries.
“Investors with hard currency-producing assets, such as critical mineral mines, face heightened risks of expropriation and nationalisation as governments scramble for liquidity,” he says.
Gallagher’s Morgan adds that “all it takes [for asset nationalisation] is a change of government, which is a fairly regular occurrence”.
2025 PRI market capacity
Despite these challenges, the brokers interviewed are positive about next year’s capacity outlook.
“If you look at a five, 10 or 15-year trend, there’s a really significant uptick in terms of the number of insurers and, by extension, the amount of capacity,” Morgan says.
Aungier agrees, noting that despite the “hardening” of the PRI market in 2022 and 2023, “support for political risk products within the reinsurance market remained robust, resulting in smooth renewals for most of our insurance partners”.
The shifting geopolitical risk landscape has changed some aspects of the market, though.
Burns at WTW tells GTR insurers are now less willing to insure multi-country portfolios.
“In the past, some carriers wanted multinational companies to come to the market with their full portfolio, because insurers didn’t want adverse selection,” she says. “In the wake of the Russia-Ukraine war and other surprises, the view is now that more risk is actually more risk.”
The amount that carriers are willing to insure per transaction has decreased, too.
“Insurers don’t want too many eggs in one basket. They are keen on the class, and very interested in writing more business, but don’t want to put too much capacity on any single risk,” Burns says.
“There used to be underwriters that would put down US$50mn to US$100mn on a single transaction. Today, they may only want to put down US$20mn or US$30mn on a similar transaction, which means more syndication is required.”
In response, Burns suggests corporates “run analytics on which countries would have the most financial impact [in the event of a political financial loss]”, and seek insurance for those.
“These might not even be the riskiest countries,” she says, “but they might be medium risk, which are often the best buys in the market”.
Burns’ final piece of advice? Hire a broker.
“[Political risk] is becoming a much harder market,” she says. “It’s becoming increasingly technical, and now you really have to emphasise the positive attributes of the risk to the underwriter. A highly technical broker can advocate [for you] and make those arguments.”
Tags: David Evans, Gallagher, Jake Aungier, Laura Burns, Rupert Morgan, Sam Wilkin, Willis Towers Watson (WTW), WTW, Zoe Towndrow
Source: https://www.gtreview.com/supplements/gtr-risk-2024/life-in-the-grey-zone-political-risk-in-2025/
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