Overview
Rising geopolitical tensions and economic nationalism are causing a slowdown in global integration, which presents significant challenges but also opportunities for insurers.
The 2008 Financial Crisis marked a significant turning point in global economic liberalisation. It prompted the rise of anti-globalisation and populist movements and significantly slowed down the steady growth of crossborder trade and foreign direct investment flows that had gained momentum since the 1980s, according to Geneva Association report. Beinsure analyzed the report and highlighted the key points.
The world has since entered an era of ‘slowbalisation’, characterised by stagnation in global integration.
Recent geopolitical upheavals – including the US-China trade conflict, the COVID-19 pandemic and the Russia-Ukraine war – have further fragmented trade and supply chains, steering the global economy towards ‘geoeconomic fragmentation’.
A Key Highlights
- Geoeconomic fragmentation slows global integration and increases insurers’ exposure to concentrated, region-specific risks. This includes greater volatility in claims and investment returns, particularly where cross-border risk pooling becomes constrained.
- Insurers face rising compliance costs and operational complexity due to diverging regulatory frameworks across regions. Some may retreat from global markets and refocus on home or geopolitically aligned jurisdictions.
- Commercial lines are under pressure from political instability, disrupted supply chains, and economic policy shifts. Sectors like engineering, trade credit, marine, political risk, and cyber insurance face growing demand and elevated claims risks.
- Industrial policy and infrastructure investment create opportunities for property and specialty insurance. The growth of renewable energy, semiconductor plants, and other strategic projects boosts demand for high-value coverage.
- Scenario planning is essential to insurer resilience amid rising global uncertainty. Insurers must prepare for multiple outcomes, including regionalisation, trade conflicts, and in the extreme, economic bifurcation into rival blocs.
This reflects nations’ increasing prioritisation of economic and national security and resilience
over efficiency – as exemplified by free trade and globally integrated supply chains – though the global economy remains deeply interconnected, making large-scale ‘deglobalisation’ unlikely.
Foreign direct investment and technology transfer
Current trends towards protectionism have reversed some of the gains from trade liberalisation made in the post-war era, which fostered global economic growth and brought down inflation.
Foreign direct investment, vital for growth and technology transfer, has also suffered. Since the Global Financial Crisis, foreign direct investment flows have declined as a share of global GDP, worsened by geopolitical tensions.
Capital increasingly gravitates within geopolitical blocs, prompting a restructuring of global supply chains via reshoring or ‘friend-shoring’.
GLOBAL TRADE FLOWS
While these strategies may reduce geopolitical risks, they come at the cost of efficiency, ultimately raising production costs and consumer prices.
Technology diffusion has been impeded
Technology diffusion has been impeded by geoeconomic fragmentation as countries enforce export restrictions to safeguard national interests.
This deceleration in innovation and productivity could lead to significant long-term GDP losses, particularly in technology-driven economies like the US and China.
Estimates suggest that the trend toward technological decoupling in itself could slash certain countries’ GDP by as much as 5%, compared to the 10-year forecast.
A HOLISTIC RISK AND INSURANCE APPROACH TO GEOECONOMIC FRAGMENTATION
Combined with restrictions on cross-border flows of goods, services, and capital, geoeconomic fragmentation could lower GDP growth in some countries by up to 12%.
Declines in cross-border trade and investment, compounded by technological decoupling, risk creating a stagflation environment characterised by higher inflation and lower economic growth.
Geoeconomic fragmentation presents notable challenges and potential opportunities for insurers. It complicates global risk management, hampering international cooperation on pressing issues such as climate change, pandemic preparedness, and cybersecurity that require coordinated action.
Insurers may face increased risk exposure
Insurers may also face increased risk exposure and insurability challenges related to these threats.
Geoeconomic fragmentation makes tackling global risks like climate change harder, and may increase insurers’ exposure to these threats.
The geographical spread of risk, a hallmark of effective insurance, is increasingly constrained by barriers to cross-border activities.
This heightens the volatility of claims and investment returns, potentially necessitating higher premiums for policyholders.
Fragmentation also increases operational complexity for international insurers, as diverging or even discriminatory legal and regulatory frameworks impose significant compliance costs, particularly in geopolitically distant regions.
This may compel some insurers to refocus on home and geopolitically closer markets, potentially spurring consolidation within the insurance industry.
Rising geopolitical tensions and economic nationalism are causing a slowdown in global integration, which presents significant challenges but also opportunities for insurers.
The commercial and specialty insurance sectors
The commercial and specialty insurance sectors face immediate and direct issues. Unlike retail insurance, which is affected indirectly by changes in economic growth and inflation, these sectors grapple with heightened risks tied to political instability and supply chain interruptions, for example.
Opportunities also arise from increased government investment in essential infrastructure, for example in semiconductor production and clean energy.
Recent industrial policies, such as the US CHIPS and Science Act, have positively influenced the outlook for commercial property insurance, which protects assets against risks like fire and natural disasters.
New investments and construction projects
New investments and construction projects necessitate comprehensive property coverage, particularly as the emphasis on strengthening critical supply chains and technological infrastructure elevates the risk profile of highvalue assets.
Engineering insurance, which addresses risks associated with the construction, installation, and operational activities of projects, is also poised for growth in a geopolitically influenced industrial policy environment.
The push for energy independence is likely to spur investments in renewable energy and localised manufacturing, increasing demand for specialised engineering insurance products for complex machinery and renewable installations like wind turbines and solar farms.
Marine insurance, cargo, and infrastructure
Marine insurance, crucial for covering losses related to ships, cargo, and infrastructure, faces challenges from geoeconomic fragmentation.
A shift from global toward localised supply chains is expected, which will affect established shipping routes.
This could, in the short term, lead to an uptick in insurance claims due to rerouting, ultimately heightening marine insurers’ risk exposure.
Geoeconomic fragmentation
Geoeconomic fragmentation also introduces complexities for trade credit insurance, which protects businesses against non-payment risks arising from trading partners’ insolvencies or defaults.
Increased trade barriers could strain firms that are reliant on international commerce, raising the likelihood of insolvencies – particularly among small and medium-sized enterprises.
Political risk insurance, which offers coverage against losses from political events such as expropriation, has gained prominence.
MACROFINANCIAL INSTABILITY UNDER GEOECONOMIC FRAGMENTATION
The tense geopolitical climate amplifies demand for this coverage, particularly among multinational companies which are now more vulnerable to actions jeopardising their foreign assets.
Cyber insurance and D&O trend
Cyber insurance, which primarily addresses losses stemming from cyberattacks and data breaches, is increasingly vital in today’s geopolitical environment.
State-sponsored cyber threats may escalate due to geopolitical tensions, exacerbating risks for businesses and adding to attribution challenges in the context of insurability.
Corporate executives and non-executives use directors & officers D&O insurance to protect against claims stemming from their decisions.
Geoeconomic fragmentation increases the potential for arbitrary regulatory investigations, which amplifies claims exposure for D&O insurers.
Reputational risks tied to political controversies further underscore the importance of D&O coverage.
Insurers must proactively adapt to geoeconomic fragmentation to maintain resilience and relevance as a stabilising force in a rapidly changing world economy.
Effective scenario planning
This methodology equips insurers to anticipate various potential futures and assess both immediate and long-term impacts on operations.
Each scenario must consider implications for critical areas such as claims frequency, severity, and investment returns, as well as impact assessments encompassing growth, profitability, and solvency.
Scenario planning can help insurers forsee and adapt to the risks and oppportunities presented by geoeconomic fragmentation.
The Geneva Association report introduces and investigates three specific geoeconomic fragmentation scenarios and possible responses from insurers.
Scenario 1
Scenario 1 envisions a gradual and controlled intensification of geoeconomic fragmentation, marked by regionalisation of trade, a further geopolitically inspired increase in government subsidies for specific domestic sectors, and selective decoupling, but not a full-scale reversal of globalisation.
In this environment, insurers must develop products that address specific, new risks emerging from more fragmented global markets.
Political risk insurance should tackle shifting trade policies, and supply chain insurance will need to adapt to more regionalised supply chains.
A more granular approach to underwriting will be essential, incorporating real-time geopolitical intelligence to assess region-specific risks.
Capital management must be highly flexible, adjusting to varying geopolitical risks across regions.
Insurers will also need to diversify asset portfolios across countries and sectors benefiting from this scenario, such as non-aligned countries and renewable energy and advanced technology companies.
Scenario 2
Scenario 2 foresees an exacerbation of geoeconomic fragmentation due to tit-for-tat measures, where escalating protectionism leads to more volatile global crossborder flows and supply chains.
Insurers will need to address heightened risks related to trade disruptions, with increased demand for products covering trade conflicts and retaliatory measures.
Underwriting must adapt to the unpredictable nature of escalating trade barriers, requiring dynamic risk assessments and stress tests.
Capital management will emphasise liquidity and flexibility, enabling quick redeployment of funds to less exposed regions.
In asset management, defensive strategies will dominate, with increased allocation toward markets insulated from geopolitical conflicts, such as non-aligned nations.
- Scenario 1 has significant likelihood, as key trading partners may adopt a transactional approach to avoid an outright global trade war. Scenario 3 is expected to remain a remote possibility.
- Scenario 2 is considered the most likely outcome, given the results of the 2024 US presidential election.
- Scenario 3 is the most extreme outcome: a bifurcation into two antagonistic blocs, prompted by a major geopolitical conflict and large-scale economic sanctions.
This radical fragmentation forces insurers to align with one bloc, severely limiting global diversification opportunities.
Insurers will need to focus on bloc-specific products, particularly in sectors like infrastructure and manufacturing, driven by government policy. Underwriting as well as capital and asset management will have to address heightened concentration risks within each bloc.
FAQ
Geoeconomic fragmentation refers to the breakdown of global economic integration due to rising geopolitical tensions and economic nationalism. For insurers, it increases operational complexity, regulatory divergence, and exposure to concentrated risks, while limiting opportunities for global diversification.
Declines in FDI affect capital flows, reduce technology transfer, and weaken economic growth—particularly in emerging markets. This limits growth opportunities for insurers and increases risk in politically or economically unstable regions.
Commercial and specialty insurance sectors face the most immediate impacts. These include political risk, marine, engineering, trade credit, cyber, and D&O insurance, all of which must adjust to new geopolitical realities.
Technology decoupling slows innovation and productivity, affecting long-term economic growth. For insurers, it introduces uncertainties in underwriting, claims forecasting, and investment performance, especially in tech-dependent portfolios.
Yes. Infrastructure investments, such as those promoted by the US CHIPS Act, increase demand for property and engineering insurance. Renewable energy and semiconductor manufacturing projects also create opportunities for specialised coverage.
Shifts in supply chains lead to new shipping routes and increased volatility in marine claims. Rerouting and regionalisation of trade heighten risk exposure and underwriting challenges for marine insurers.
Scenario planning helps insurers evaluate geopolitical developments, model financial and operational impacts, and prepare adaptive responses. It supports proactive decision-making in underwriting, capital allocation, and risk management.
………………………
AUTHOR: Kai-Uwe Schanz – Director Macro and Geoeconomic Shifts | Financial Inclusion, Geneva Association
