Cyber, sanctions and war reshape insurance advice
The impact of geopolitics on the South African insurance landscape is an excellent backdrop for a discussion on the interconnectedness of risk. It also set the scene for a recent thought leadership presentation to Insure Talk 56, under the title How global tensions reshape insurance and risk management.
A connected but fragmented world
“The world is more connected than it has ever been, but at the same time it remains very fragmented,” said Shaun Scandling, MD of HDI Global SE, as he set about explaining why geopolitics cannot be dismissed as an abstract concept by insurance stakeholders. Cross-border conflicts, disrupted supply chains, rising cyber threats and skyrocketing energy prices affect businesses and households at the southern tip of Africa as much as they do in other countries, just to varying degrees.
There have been countless geopolitical shocks over the years including the 1950s Cold War between the then Soviet Union and the United States (US); the oil supply crisis in the 1970s; the fall of the Eastern Bloc in the late 1980s; and the Gulf War in the early 1990s. But the crises have continued unabated into the 21st century to include the 9/11 bombings and subsequent response; the 2008 Global Financial Crisis (GFC); and more recently, conflict between Russia and Ukraine, and Hamas and Israel in the Middle East.
Although these events destabilise the economies at their epicentre, their effects are felt across an interconnected world. Take Russia’s 24 February 2022 incursion into Ukraine as an example. “Almost overnight, commodity prices surged, and global shipping had to be rerouted … with ripple effects quickly spilling over into the South African market,” Scandling said. A direct impact stemmed from the country’s reliance on Russia and Ukraine for 30% of its wheat imports. Indirectly, SA faced a range of disruptions to supply and demand too.
Demand-supply imbalances on the rise
The Russia-Ukraine war ballooned into a European-wide and global tragedy that triggered huge insurance premium increases for aviation, marine, PVT and war cover. As the war continues into a fourth year, the world is still dealing with its aftershocks, not to mention the potential for further escalations in the conflict. The West is trying to force Putin’s hand by imposing sanctions on Russia. Unfortunately, these sanctions have caused demand-supply imbalances in a wide range of goods and services, pushing prices higher.
“There are real world consequences for conflicts that erupt on another continent or on the other side of the world,” Scandling said, describing geopolitics as the art and science of international relations. Closer to home, instability in the Sahel region is spilling over into Mali and Nigeria, displacing millions of people and disrupting mining operations that were critical to cobalt and platinum supplies. Scandling reminded his audience of recent insurgencies in Mozambique which had threatened major gas projects. “Since 2014, there have been no fewer than 150 conflicts ongoing in any one year,” he said.
There is a healthy dose of geopolitics impacting the cyber security realm too. “State-sponsored cyberattacks, often attributed to North Korea and Iran, target critical infrastructure with the aim of disrupting other countries,” the presenter said, citing a 30% uptick in ransomware claims linked to geopolitical actors in 2024. And there have been countless allegations of Russia’s cyber-meddling in US elections too.
Trade wars and technology bans
Trade wars introduce an entirely different backdrop for global business, again forcing insurers and reinsurers to reconsider their exposures. Under President Donald Trump, the US has turned to technology bans and trade tariffs in an attempt to revitalise domestic manufacturing and regain its global tech leadership. The domestic wins, one could argue, are dwarfed by the consequent disruption to global supply chains.
Whether you are talking about trade wars between the US and the rest, China’s territorial sabre-rattling or extremist violence and political instability in the Sahel region in Africa, insurers and reinsurers are left grappling with uncertainty in global markets and risk landscapes. This matters because underwriting, at its core, is the business of identifying, managing and pricing for uncertainty.
The presenter noted that the risks introduced by global geopolitics were exacerbated by a long list of domestic challenges. “We have a multiplier effect in South Africa as it relates to geopolitics, and that is reshaping the insurance industry,” Scandling said. For example, Eskom’s electricity supply crisis was exacerbated by global coal and oil price shocks, and our well-documented port infrastructure shortcomings are compounded by Red Sea shipping disruptions.
Geopolitics is a top-ranked risk
How should South African insurers respond? First and foremost, they must accept geopolitics as a top-ranked risk, as identified by the latest World Economic Forum (WEF) Global Risk Report. Local insurers cannot afford a siloed approach to risk management. “Political risk, political violence, supply chain failures and cyber threats are all converging,” Scandling said. He encouraged brokers and risk managers to help firms to identify the risks on the horizon: “We need to keep our finger on the pulse of geopolitics.”
It seems local insurers are in for some tough trading years that will be defined by escalating geopolitical risks, rising exposures and a step change in both the frequency and severity of claims. In this world, niche covers for loss or damage due to civil unrest or political violence will become mainstream. “South Africa has seen a surge in civil unrest, amplified by food inflation and poor service delivery,” Scandling said. This culminated in R32.5 billion in claims paid by state-owned Sasria SOC Limited following widespread civil unrest in July 2021.
Global reinsurers are concerned about correlated risks, and are cautious about emerging markets. This is illustrated by huge spikes in PVT coverage in the South African market following the aforementioned civil unrest event. Meanwhile reinsurers emerge as the driving force behind local insurers’ response to evolving risks. For example: all local non-life insurers gave in to reinsurer pressure to introduce national grid failure exclusions due to the country’s loadshedding dilemma.
Supply chain disruption impact claims
The presentation offered some insights into how an insurer’s exposure to a local risk event, such as extreme flooding in KwaZulu-Natal (KZN), is magnified by geopolitics. Imagine, for example, you are unable to reinstate a critical piece of equipment because of supply shortages, delays in delivery and potential sanctions issues. If you cannot secure this equipment, the reinstatement takes a lot longer and ends up costing a lot more.
The semiconductor industry offers another great backdrop for discussions about supply chain disruptions. Semiconductors are used in everything from artificial intelligence (AI) to electric vehicles (EVs) to Internet of Things (IoT) devices. These chips are manufactured predominantly in Taiwan and the US, and the raw materials needed are mainly refined in China. According to Scandling, an escalation in trade tensions between the US and China, or an incursion by China into Taiwan, could lead to significant constraints across the global semiconductor market. “We had a sniff of semiconductor shortages during the COVID pandemic,” he said.
The presenter conceded that geopolitics made underwriting tricky. “Traditional actuarial models rely on historical data which are somewhat predictable, but geopolitics [pushes things towards] black swan territory,” he said. Nowhere is this better illustrated than where the world of conflict intersects with cyber threat. Case in point, a recent cyberattack against Ukraine remotely disabled switches on circuit breakers, cutting electricity to thousands of people for several hours.
Proactivity essential for resilience
The examples in this newsletter demonstrate that geopolitics is now inseparable from technology and infrastructure risk. And the insurance industry cannot afford to respond after the fact. “For our clients, geopolitics demands a bit of a mind shift from being reactive to being resilient,” Scandling said. Insurers, reinsurers and brokers were challenged to bring geopolitical awareness into the heart of underwriting and risk management, with tangible interventions such as rethinking global supply chains.
Geopolitics has become a front-line risk driver that must shape underwriting, pricing and claims. Insurers and reinsurers will have to track global conflict and sanctions and embed resilience into underwriting strategies. The bottom line is that uncertainty has become a defining feature of modern insurance.
Writer’s thoughts:
Geopolitics is shaping non-life insurance underwriting, pricing and claims in South Africa as much as anywhere else. Are brokers and insurers responding quickly enough to assess the impact of this unrelenting force on clients’ risk profiles? Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
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