Insurance in a more divided world

Since the 1980s, international dynamics have tended toward greater integration of countries, regions, and their economies. Nevertheless, this movement began to slow following the financial crisis of 2008. Now, the trade wars between the United States and China, the abandonment of multilateralism by the new Donald Trump administration, and the war in Ukraine seem to mark a new turning point, marked by a rise in geopolitical disputes and greater economic fragmentation.

The Geneva Association, the world's leading insurance group, addressed this issue and its impact on the sector in its latest report Insurance in a fragmented global economy, in which MAPFRE Economics, MAPFRE’s research arm, took part. This study lists some of the main consequences of this polarization:

• Decrease in trade and international investment: with higher prices for producers and consumers due to tariffs, supply chain problems, greater concentration of these flows, etc.
• Technological dispersion, mainly due to restrictions on exports (e.g., semiconductors), which could slow innovation and advances in technology.
• Erosion of multilateralism, with very negative effects on issues such as climate change mitigation, cybersecurity, and pandemic preparedness.
• Lower economic growth. According to MAPFRE Economics, decoupling could cost the global economy between 1 and 2 trillion dollars annually, due to trade interruptions, reduced technological collaboration, and increased military spending.
• High inflation caused by many of the factors mentioned, in addition to greater exposure to shocks in oil prices or an increase in military spending.

In the face of rising uncertainty and growing threats, insurance and global risk management can be highly beneficial for economic actors by providing financial stability, according to the Geneva Association. The belief is that demand will increase for insurance solutions covering risks such as political instability, trade disruptions, or supply chain interruptions.

This thesis becomes evident when considering, for example, insurance policies such as cargo or transportation damage coverage, which are essential for international trade; business interruption insurance, which enables companies to operate in complex environments with greater certainty; or casualty insurance for executives of multinational corporations operating in countries with lower legal security, where domestic disputes can have a significant impact.

Although this scenario may entail new opportunities, it also poses a series of factors that will condition the insurance business and in many ways will make risk management with a global component more complicated. The report quotes:

• Global risks. Geopolitical tensions and reduced collaboration from governments internationally on critical issues such as climate change, cybersecurity, and pandemics. All of this affects insurance with greater exposure to risk and greater challenges to continue offering protection to clients.
• International diversification of risk. Diversifying risk is an essential part of the proper functioning of insurers, whether through their own operations or reinsurance, since it makes them less vulnerable to occasional risks, such as a natural disaster, and allows them to make their capital more efficient. By contrast, limiting access to global markets increases risk concentration.
• Global presence. As in other sectors, many insurance companies embark on internationalization strategies that allow them to gain scale in their business, which promotes competitiveness. Greater distancing between countries and regions can frustrate these attempts.
• Commercial and specialized insurance, such as that covering major engineering projects, industrial production, and international transport, is most affected. While in property & casualty insurance (the most common, such as car, home, etc.) risks are indirect, in the global risk sector, threats like political instability or stricter regulations become much more tangible.
• Falling demand for private insurance. Slower economic growth and rising inflation reduce consumers' purchasing power, negatively impacting the demand for property and casualty insurance policies. This effect could be even more pronounced for products like life insurance, which are often viewed as non-essential.
• Lower financial stability: markets will face challenges due to global fragmentation, which could undermine a significant part of insurance companies’ activities related to their role as investors. This would weigh down its results and solvency. 

The Geneva Association highlights that the impacts on the insurance sector, as well as the potential responses, will vary significantly depending on how events unfold and how the international economic landscape evolves—ranging from gradual, controlled fragmentation to a sharp polarization of the world into two blocs, reminiscent of a new Cold War.

However, in the most likely scenarios, globally operating insurance companies will be able to adapt to these new conditions through various strategies. These may include redesigning products to address emerging risks related to supply chains or credit insurance in international trade; incorporating real-time data analysis tools that factor in geopolitical developments and predictive models for underwriting; integrating scenario analysis and stress testing into their risk management frameworks; and capitalizing on opportunities arising from trends like reindustrialization or new government industrial policies.

This new international order poses difficulties for insurance, but also for many other sectors of activity. And in a context in which doing business at the international level is structurally more complex and costly, the stability and protection that insurance can offer will be more valuable.

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