Guy Carpenter’s Jay Dhru and Richard Hewitt discuss how (re)insurers can meet the challenges of volatility in an uncertain world
Geopolitical risks have intensified over the past decade, from supply chain disruptions and trade wars to large-scale conflicts and market uncertainty.
Simultaneously, we have witnessed the rise of geoeconomics, which is the use of economic tools – including tariffs, trade barriers and industrial policies – to achieve geopolitical goals. This is the complex context in which cedants are making strategic business decisions, including decisions about reinsurance.
For the (re)insurance industry, these developments are far from abstract concerns. They strike at the heart of the economic environment and the volatility landscape in which insurers operate and invest.
The direct impacts on economic growth, inflation and interest rates are compounded by complex second-order effects – shifts in exchange rates, debt levels and credit conditions – that further shape the insurance marketplace.
The Landscape of Volatility
Notwithstanding the COVID-19 pandemic and subsequent surge in inflation, the origins of volatility over the past 20 years have undergone a significant transformation. They have evolved from being driven primarily by macroeconomic imbalances and financial markets to being shaped by geopolitical tensions and related factors. This is illustrated by contrasting the global financial crisis (GFC) and Euro crisis of 2005-2014 with the kinetic conflicts, geopolitical rivalries and trade wars of 2015-2025, which are likely to continue.
Since 2020, there has been significant escalation in global conflicts and civil unrest, which has presented heightened risks for insurers operating in affected and adjacent regions. Conflict rates have more than doubled in this period, with prolonged violence in regions such as the Middle East, the Sahel and Ukraine. Additionally, more than 160 major antigovernment protests occurred across 75 countries in the past year. These have increased exposure to property damage, business interruption and liability claims, as well as increased operational risks and supply chain disruptions, while also potentially constraining growth and adding to inflation. Such developments underscore the growing complexity of geopolitical and socioeconomic factors that insurers are experiencing.
The good news is insurers have learned to live and, indeed, thrive in a world of uncertainty. While the nature of uncertainty is different following events like 9/11, Hurricane Katrina, the GFC or the Euro crisis, (re)insurers have met the challenges head-on by always maintaining strong liquidity and capital strength and evolving their products and pricing strategies in response to market needs.
Responses to Volatility
Defending against the challenges of volatility involves a multipronged approach, with responses including:
- Diversification: Spreading risk across geographies, sectors and products remains essential. Reinsurance is a cornerstone of this strategy.
- Rigorous risk assessment: Incorporating geopolitical and economic factors enables insurers to identify vulnerabilities and recalibrate risk exposure.
- Dynamic pricing and advanced analytics: Leveraging machine learning and AI empowers insurers to develop responsive pricing models that reflect evolving market realities.
- Agile investment strategies: Asset-liability management, liquidity planning and diversified portfolios are critical to withstand interest rate and market volatility.
- Scenario planning: Preparing for a range of geopolitical and economic futures allows insurers to craft resilient strategies and cultivate vital relationships for crisis response.
- Robust capital modelling: Insurers must maintain capital models that ensure sufficient reserves to satisfy clients, investors, regulators and rating agencies – even under extreme stress. This includes evaluating capital composition, efficiency, reinsurance usage, sensitivity and the capacity to raise additional capital when needed.
How Guy Carpenter Can Help
Volatility reminds us of the fundamental value of insurance and, therefore, the potential to develop new opportunities. Guy Carpenter’s unparalleled insights, provided by dedicated experts utilising cutting-edge tools, along with our broking, strategic advisory and analytics services, empower clients to navigate uncertainty with confidence. The businesses of Marsh McLennan are well-placed to assist insurers in developing tools to support strategic responses to volatility.