How does a more complicated international scenario affect the insurance industry?

MAPFRE Economics, MAPFRE’s Economic Studies Center, has published its report Risk Environment 2024-2026, in which it analyzes the international geopolitical and socioeconomic outlook, the dynamics that generate tension in these areas, and the response to them.

The main global trends that MAPFRE Economics identifies as risks include:

• The energy markets, with rising gas and oil prices caused by the conflicts in Ukraine and the Middle East.
• Inflation, driven by rising energy prices, but also by other causes such as the trade war that began during the Trump administration, which has added fuel to the fire of the complex global economic landscape.
• The surge in global debt, coupled with the attendant risks of liquidity in the financial system and the solvency of both public and private entities, alongside a pronounced overvaluation of certain assets that has led to “excesses,” particularly in equities.
• Economic policies, which seek to combine aspects such as tight monetary policy with stimuli or access to credit. According to MAPFRE Economics, it’s an economic risk with significant social and political implications.
• Financial and real estate tensions in China, of global importance due to the enormous weight of the country’s economy.
• Climate change and its associated risks, not only extreme weather events but also the energy transition and its impact on competitiveness.
• Geopolitical conflicts, a risk that has grown well above the rest since 2019, according to the World Economic Forum (WEF). They’ve had countless ramifications, extending to economic, political, social, and governance spheres. Ukraine and Gaza are just two instances among a lengthy list that encompasses the China-US power struggle and the rhetorics that pit the West against the global South.

These dynamics influence and shape various economic actors worldwide across numerous sectors. MAPFRE Economics has identified five ways that geopolitics could affect the insurance industry and “reshape the landscape of insurable risks.”

1. Economic impact

Geopolitical tensions contribute to economic fragmentation, with consequences such as trade disputes or disruptions in global supply chains. “This is expected to lead to lower growth in economic activity,” according to MAPFRE Economics. This would negatively impact the growth of insurance premiums, given their “strong correlation with GDP growth levels.”

Furthermore, access to certain markets may become more difficult, affecting insurance companies’ ability to diversify risks. The deglobalization trend is also driving inflation, which may have a negative impact on costs and the adequacy of loss reserves.

2. Political risks

Heightened geopolitical tensions present both risks and opportunities for the insurance industry, particularly for insurance related to political violence. For example, insurance companies have withdrawn from markets such as Ukraine and reduced coverage in risk regions, such as Israel and Taiwan. On the flip side, insurance demand has risen in other regions of the world, where there have been growth opportunities for the sector.

3. Legal and regulatory fragmentation

As economies diverge, driven by changes in national security, companies face greater political uncertainty due to more disparate legal systems. This legal and regulatory fragmentation can limit insurance companies’ underwriting and investment opportunities, expose them to compliance and reputational risks, and complicate their strategies for international expansion.

4. Supply chain restructuring

Geopolitical tensions can lead to changes in international economic flows. While some countries may benefit from attracting companies to their borders, thereby boosting their insurance industries through increased commercial insurance premiums, replicating entire supply chains “can be prohibitively expensive and a burden on both companies and governments,” warns the MAPFRE Economics report.

5. A decline in global cooperation

Geopolitical confrontations hinder global cooperation that is essential and necessary to address critical threats such as climate change, energy security, health, and cyber risks. This could jeopardize the green transition, for example, and potentially escalate into a “green cold war,” where blocs of countries with similar ideologies form coalitions pursuing different approaches and aspirations toward green energy and technology, thereby impacting the role of insurance companies in supporting these projects.

“This array of potential impacts that geopolitical risks could have on the insurance industry underscores the importance of adapting to an increasingly fragmented and uncertain global landscape. Insurance companies must innovate and reassess their strategies in response to these emerging challenges,” said Gonzalo de Cadenas-Santiago, Director of Macroeconomics and Financial Analysis.

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