Geoeconomic Fragmentation: Strategic & Operational Impacts on the Insurance Sector

Geoeconomic fragmentation makes managing global risks like climate, cyber, and pandemic risks more difficult for insurance and reinsurance sectors. With increasing geopolitical tensions, shifting trade policies, and emerging economic blocs, geoeconomic fragmentation presents major challenges but also opportunities for insurers, according to Geneva Association report. Beinsure analyzed the report and highlighted the key points.

Firstly, it examines how fragmentation exacerbates the difficulties of managing global insurance risks, especially those which require international, government-level collaboration.

It then explores how increasing barriers to cross-border economic activity limits insurers’ ability to spread risk geographically, impacting their underwriting and investment portfolios, and ultimately the cost of insurance.

A Key Highlights

• Geoeconomic fragmentation reduces international cooperation, complicating insurer responses to global challenges like climate change, pandemics, and cyber threats.
• Increasing barriers to cross-border activity limit insurers’ ability to spread risks, raising concentration risk, claims volatility, and overall insurance costs.
• Regulatory divergence across economic blocs forces insurers to implement multiple systems, raising complexity and reducing global capital efficiency.
• Demand is rising for products like trade credit, political risk, and cyber insurance, while life insurance faces pressure from declining income and macroeconomic uncertainty.
• Reinsurers still operate across borders and absorb global risks more efficiently, but even they face challenges from geopolitical tensions and rising regulatory burdens.

Report sheds light on how insurers may have to adjust their international market strategies and the consequences for the industry’s global footprint.

Direct Influences on Insurance Demand

Geoeconomic fragmentation influences the demand for certain insurance products both directly and indirectly through several mechanisms. This is followed by an analysis of how fragmentation directly or indirectly influences the demand for certain insurance products, by line of business.

Finally, second-order effects arising from heightened financial market volatility are explored.

The global geopolitical landscape is growing increasingly complex, influencing various aspects of business operations, from regulatory shifts to market access and technology and data requirements. However, long-term economic trends remain positive, driven by factors like population growth and rising consumption.

Kweilin Ellingrud, Senior Partner, McKinsey

“In this evolving environment, insurance plays a crucial role in stabilising established markets and supporting the development of new ones by managing both traditional and emerging risks, such as cyber threats and advanced technologies like generative AI. Despite facing numerous challenges, the outlook for the insurance industry remains optimistic,” Kweilin Ellingrud says.

Geoeconomic Fragmentation and Insurance

“Geopolitical and geoeconomic fragmentation poses a significant risk to the insurance industry’s capacity to effectively diversify its risk portfolio. Fragmentation – manifested through trade disputes, regulatory divergence, or economic decoupling – constrains the geographic
and sectoral reach of insurers,” Lard Friese, CEO, Aegon said.

As regulatory landscapes become more localised and fragmented, barriers to capital fungibility and diversification emerge.

The increasingly localised regulatory focus with less consideration of group context hinders global capital flows and the global pooling of risks, undermining insurers’ abilities to achieve the economies of scale and capital efficiency that are essential for competitive pricing and comprehensive coverage.

Lard Friese, CEO, Aegon

Moreover, fragmentation disrupts the syndication of risk – the practice of distributing large risks across multiple insurers globally. This fragmentation drives up operational costs for insurers and potentially leads to higher premiums for policyholders.

Capital fungibility and diversification are also a cornerstone of financial resilience, especially in life insurance, pensions, and long-term savings.

These products require insurers to make long-term investments, often across multiple global markets. A well-diversified investment portfolio enables insurers to reflect the illiquid nature of long-term liabilities and navigate the risks associated with these liabilities, such as interest rate fluctuations, inflation, and market volatility.

“Ultimately, diversification allows the insurance industry to function as an economic ‘shock absorber’. By spreading risks globally, insurers can mitigate the impact of economic downturns or crises, thereby playing a critical role in maintaining financial stability for individuals, businesses, and governments,” Lard Friese says.

Climate, Pandemic, and Cybersecurity Risk

Insurers face higher exposure to global risks due to declining international cooperation on critical issues such as climate change, pandemic preparedness, and cybersecurity, according to Top Risk in Insurance research.

Political tensions and reduced coordination among governments obstruct effective risk reduction, limiting the insurability of global threats.

Climate risk reduction

Climate change presents a cross-border externality. Greenhouse gas emissions extend beyond national jurisdictions and escape market pricing, making regulation and mitigation more difficult.

Climate risk reduction remains necessary to maintain the insurability of physical climate events. Without mitigation, the frequency and intensity of disasters such as floods, wildfires, and hurricanes increase, resulting in higher claims and pressuring insurers to raise premiums to maintain profitability.

Geoeconomic fragmentation

Geoeconomic fragmentation reduces cooperation needed for mitigation strategies. This undermines long-term efforts to maintain affordable and sustainable coverage for climate-related risks.

Pandemic risks present a similar challenge. Since health crises affect multiple countries simultaneously, government coordination supports faster responses and better outcomes.

Data sharing and joint emergency planning improve health system responses and allow insurers to better estimate and manage pandemic-related claims.

Without such cooperation, the unpredictability and financial severity of health emergencies will continue to destabilise insurance markets, especially in lines related to mortality, hospitalisation, and business disruption.

Cyber threats

Cyber threats operate across national boundaries. Coordination between governments and companies allows for shared intelligence and common security frameworks.

These actions reduce the likelihood and severity of attacks and support the insurability of cyber risks. Standardising cybersecurity regulation helps establish clearer expectations and more consistent risk management across borders, reducing financial uncertainty for insurers.

Due to geoeconomic, political, and regulatory fragmentation, we expect large insurance groups to refocus on their core regions to achieve scale and secure the top five positions in each market or opportunistically monetise their expertise in select new growth markets.

Nicolas Desombre, Citi

This is likely to drive further consolidation, particularly in commercial lines, reinsurance, and P&C, as well as personal lines.

While insurers face growing pressure to enhance efficiency through digitalisation, there are also significant challenges and opportunities in developing new solutions to address global warming, ageing, cyber, and political risks, while leveraging AI advancements.

“Overall, although the business models of the largest insurance players have proven resilient in the years following the pandemic, sustained fragmentation could reshape the industry – ironically strengthening key players in their respective markets,” Nicolas Desombre said.

International Risk Diversification

Insurers manage risk by distributing exposures across countries through operations and reinsurance. This approach reduces concentration risk, smooths investment and underwriting results, and improves capital use.

Diversification helps manage correlated shocks, such as natural disasters or macroeconomic disruptions.

However, geoeconomic fragmentation restricts diversification. Limited access to foreign markets raises concentration risk on the asset side and limits investment returns. On the liability side, cross-border risk pooling becomes more difficult.

As insurers cover fewer independent risks in smaller geographic zones, regional exposures become more correlated, leading to higher volatility and claims uncertainty.

Impact on Insurance Costs

Fragmentation raises the cost of insurance by weakening diversification benefits.

Smaller and more concentrated risk pools reduce the accuracy of predictions based on past data. As a result, insurers face higher uncertainty in pricing and must hold more capital.

This reduces capital efficiency and increases premiums for policyholders. Insurers must adjust their models to reflect the increased volatility and reduced risk predictability within fragmented markets.

Reinsurance and Fragmentation

Largest reinsurers reduce the negative effects of fragmentation by distributing risks across wider markets. Unlike many primary insurers with domestic operations, reinsurers operate internationally and help stabilise the insurance sector.

Since reinsurance trade faces fewer cross-border barriers, it supports continued global risk sharing.

Reinsurance improves capital efficiency by covering risk at lower capital costs than less diversified insurers. This reduces the total cost of risk and lowers required reserves.

As a result, primary insurers can keep premiums affordable even under fragmentation pressure. The transfer of cost savings from reinsurers to insurers and then to policyholders supports overall market stability.

Global Operations and Regulatory Divergence

Fragmentation also challenges international insurance operations. As geopolitical blocks diverge, legal and regulatory requirements across countries become less consistent. Insurers must implement multiple compliance and reporting systems, which raises operational costs and reduces profitability.

Increased divergence also forces insurers to modify product offerings and business structures to align with local rules.

These adjustments add to expenses and introduce new operational risks. Companies maintaining a global footprint must manage different supervisory expectations and changing regulations, which complicate international strategies and reduce efficiency.

Fragmentation Impacts on Commercial, Specialty, and Retail Insurance

Commercial and Specialty Insurance

Commercial and specialty insurers operating across borders are experiencing direct consequences from geoeconomic fragmentation. Political instability, trade barriers, supply chain disruption, and regulatory divergence are increasing risk exposures.

Higher public investment in infrastructure and industrial capacity—particularly in sectors like semiconductors and renewable energy—is expanding insurance demand.

Increased volatility also drives businesses to seek more protection, opening new avenues for insurance coverage.

Over the next five years, government-backed re-shoring and ‘friend-shoring’ initiatives are expected to add over $30bn in new commercial insurance premiums. This trend reflects the dual impact of fragmentation: rising exposures and increased insurance demand.

Geoeconomic fragmentation is a multi-faceted phenomenon. On the one hand, we have seen fairly moderate economic decoupling between the US and China. On the other, we are witnessing the emergence of new patterns of connectivity involving medium-sized economies, sometimes referred to as ‘reglobalisation’.

Thomas Seidl, Allianz

For insurers, currently the first-order effects of fragmentation on business growth, underwriting profitability, customers, and employees seem to be manageable.

“Second-order effects, e.g. arising from turbulence in financial markets, require strong attention as they might be far more material. In any case, insurers need a highly agile risk and resilience approach to navigating the current environment on the basis of well-prepared mitigation instruments for a wide spectrum of scenarios along the macro-risk continuum,” Thomas Seidl says.

Property Insurance

Geopolitical shifts have led to industrial policies such as the U.S. CHIPS and Science Act, which stimulate domestic construction and manufacturing.

These developments create greater demand for commercial property insurance that covers buildings, equipment, and inventory.

As countries prioritise technological infrastructure and supply chain security, insurers must provide policies suited to high-value physical assets.

Engineering Insurance

Engineering insurance, which covers construction, installation, and project operations, also benefits from this shift. Governments promoting domestic energy production and infrastructure resilience are driving demand for such coverage.

Countries aiming to reduce dependence on foreign suppliers are investing in renewable energy and localised manufacturing, creating a market for insurance products covering machinery and energy infrastructure projects like solar and wind installations.

A more fragmented world is likely to experience slower economic growth and higher inflation. This shift could negatively impact key areas of the insurance industry, particularly savings-oriented life insurance and property insurance.

Gerardo Di Filippo, Generali

“However, the effect on specialty lines is more mixed. For instance, marine insurance might see a boost in demand and higher rates due to shipping routes becoming longer, less familiar, and consequently riskier,” Gerardo Di Filippo says.

Marine Insurance

Marine insurance, which covers cargo, vessels, and port infrastructure, is closely linked to global trade. Fragmentation is altering shipping patterns, with more regional supply chains replacing global ones.

These changes may lead to more claims, as delays, route changes, and storage requirements increase operational risk.

Sanctions and trade restrictions also pose challenges. Ships trading with sanctioned countries could become uninsurable or face higher premiums.

While trade volumes may decline, the risk level of remaining trade flows may increase. This raises exposure for marine insurers, especially as trade routes grow more complex and unpredictable.

Property and casualty (P&C) insurance will likely bear the largest impact from these changes, as it tracks GDP and international trade most closely.

Credit insurers may also face rising losses due to declining export profitability and reduced cross-border transactions. Compliance costs, including for KYC and sanctions screening, are likely to increase across re/insurers.

Trade Credit Insurance

Trade credit insurance protects businesses from buyer default, often caused by insolvency or political interference.

Fragmentation, by disrupting trade flows and raising costs, increases the risk of default, particularly for small and medium-sized firms. As financial stress rises, insurers may adjust premiums to reflect greater default risk.

However, demand for trade credit insurance is also likely to grow. Businesses will need coverage to manage payment risk in uncertain trading environments. Insurers may expand product offerings to cover defaults related to political conflict or supply chain disruption.

Political Risk Insurance

Political risk insurance covers losses from events such as expropriation, currency inconvertibility, and political violence.

Businesses face greater exposure to these risks as governments adopt more protectionist policies and geopolitical tensions increase.

In geopolitically distant countries, firms may be more vulnerable to sudden regulatory or political shifts.

Rising state hostility may also manifest in indirect actions targeting foreign enterprises, increasing demand for political risk coverage, particularly among multinational firms.

Geoeconomic fragmentation is poised to result in more volatile international relations across a wide range of areas, including, for example, multilateral agreements on climate risk mitigation, cross-border trade, and capital flows.

Michael Menhart, Munich Re

“This shift presents strategic, commercial, and operational challenges for re/insurers. However, a more unstable world also offers opportunities for our industry, leveraging our unique capability to absorb and manage volatility both domestically and internationally. By providing risk management solutions for a fragmented world, re/insurers can reinforce their role as a stabilising force,” Michael Menhart said.

Cyber Insurance

Cyber insurance covers losses from attacks, data breaches, and other digital threats.

Fragmentation contributes to more aggressive cyber activity, including politically motivated intrusions, infrastructure attacks, and espionage. Annual global losses from cyber incidents already exceed $1 tn.

Data localisation laws, which require domestic storage of data, further complicate compliance and data protection for global businesses.

Multinational firms must manage cybersecurity risks across jurisdictions with varying standards. Cyber insurers must offer adaptable coverage to address these challenges.

D&O Liability Insurance

D&O insurance protects executives from legal claims related to their decisions. As governments tighten oversight of foreign businesses, the likelihood of investigations and penalties against company leadership increases, especially in geopolitically sensitive regions.

Fragmentation also raises operational and financial risks, particularly from supply chain disruption. Directors may face lawsuits if their companies fail to address these exposures effectively.

Political affiliations, sanctions, or reputational incidents can also prompt shareholder action. Insurers must adjust D&O coverage to reflect the increased legal and reputational risks faced by leadership teams.

Retail Insurance

The macroeconomic effects of fragmentation—slower growth and higher inflation—affect life and non-life insurance differently. Life insurance demand is highly sensitive to income.

During downturns, customers may cancel policies or delay new purchases. Increases in income, by contrast, tend to boost life insurance uptake. In some markets, a 1% income change corresponds to a 2% shift in demand.

Non-life insurance, including health coverage, is less income-sensitive. Demand remains relatively stable through economic cycles. As such, macroeconomic conditions driven by fragmentation will weigh more heavily on life insurance sales.

FAQ

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QUOTES: Kweilin Ellingrud – Senior Partner in the McKinsey Minneapolis office, Lard Friese – CEO, Aegon, Nicolas Desombre – Citi, Gerardo Di Filippo – Generali, Michael Menhart – Munich Re, Thomas Seidl – Allianz