Lloyd’s Calls for Clearer War Risk Insurance Coverage and Pricing

Lloyd’s outlines how insurers are adapting war risk coverage, cyber war exclusions and pricing to geopolitical threats, hybrid warfare and rising exposure accumulation.

Lloyd’s emphasis on contract certainty is intended to establish precisely which risks insurers cover, rather than exclude state-backed threats from the market altogether.

Rachel Turk, chief of performance and strategy at Lloyd’s, said insurers need greater clarity over war risk coverage, particularly where state-backed cyberattacks, geopolitical instability and systemic exposures could generate substantial losses.

• Lloyd’s is encouraging clearer war risk exclusions and standalone cyber war policies to help insurers and policyholders understand their exposures.
• Aviation and marine war risk pricing has responded rapidly to geopolitical developments, with seven-day cancellation provisions allowing terms to be renegotiated.
• Hybrid warfare, state-sponsored cyberattacks and critical infrastructure threats are increasing the need for updated policy wording, better data and more sophisticated scenario testing.

Speaking at the AM Best Insurance Market Briefing Europe in London, Turk discussed the insurance market’s approach to war exclusions, rapidly changing aviation and marine risks, and the need for better scenario modelling.

Turk said insurers must understand the potential accumulation and aggregation of losses before accepting risks that could exceed their available capital.

Lloyd’s focuses on contract certainty and war risk exclusions

Lloyd’s work on contract certainty aims to distinguish the risks insurers knowingly accept from exposures that could accumulate without being adequately identified or priced.

Turk said the purpose was not to classify state-backed hostility as inherently uninsurable or separate it categorically from other systemic threats.

Instead, insurers need to understand the scope of their commitments, the potential scale of losses and how individual exposures could combine across portfolios.

Even substantial systemic exposures can remain insurable when underwriters understand their characteristics and establish appropriate limits.

Insurers can cover significant systemic risks when exposures are measurable and manageable, potentially using sublimits to control the amount of protection provided.

The main concern is providing coverage for state-backed conflict without recognising that the exposure exists or understanding how losses could accumulate.

Turk said this could create serious financial risks for insurers whose balance sheets cannot absorb unlimited losses.

The emphasis on contract certainty is therefore intended to make the insurance agreement more transparent for underwriters, brokers and policyholders.

Standalone cyber war insurance could address state-backed attacks

Turk expressed support for standalone cyber war insurance policies as a way to provide explicit protection against state-backed cyber incidents.

Such products would allow insurers to define the insured events, establish appropriate terms and monitor their overall exposure to potentially correlated losses.

Clients would have a clearer understanding of the protection purchased, while underwriters could assess the liabilities they were accepting.

Dedicated policies could provide a more effective solution than allowing war-related cyber exposures to remain embedded in broader contracts without sufficient clarity.

Standalone cyber war insurance can help insurers identify and aggregate exposures while giving businesses clearer protection against specifically defined state-backed cyber incidents.

The approach would also support more deliberate underwriting decisions around coverage limits, exclusions and the potential financial consequences of coordinated attacks.

Turk said the objective is not to discourage insurers from covering war-related events, but to ensure that such coverage is intentional, properly structured and understood by both parties.

Aviation and marine war risk pricing responds to geopolitical escalation

Marine and aviation insurers have faced direct financial exposure to geopolitical conflict, including attacks on vessels and other assets operating in affected regions.

Marine war risk insurance in these sectors frequently includes provisions allowing cancellation on seven days’ notice, giving underwriters the ability to respond when conditions deteriorate.

Turk suggested these arrangements should be understood primarily as mechanisms for renegotiating coverage rather than simply cancelling insurance.

During the Middle East crisis, she said, the market continued offering protection despite significant changes in the risk environment.

Seven-day cancellation provisions effectively give insurers an opportunity to renegotiate policy terms when the threat environment changes substantially during the coverage period.

According to Turk, insurers adjusted pricing rapidly as new information emerged about the developing conflict. She described the market’s response as an example of pricing reacting directly to changing supply, demand and risk conditions. “Real time updates on the risk conditions were being reflected into pricing conditions almost instantaneously across the market,” she said.

Turk said the experience demonstrated that underwriters could adjust their terms quickly when they receive reliable and timely information.

The Middle East crisis demonstrated how aviation and marine war risk premiums can adjust almost immediately as insurers reassess the severity and location of geopolitical threats.

The ability to revise terms is particularly relevant for movable assets such as aircraft and vessels, whose exposure to conflict can change substantially during the policy period.

Political risk modelling requires better data and scenario testing

Turk identified scenario development as an important area for innovation in political risk and war accumulation modelling.

Insurers could benefit from collecting more information, although the quality of their analysis also depends on how they interpret and apply existing data.

Scenario testing can help insurers examine potential geopolitical events, identify weaknesses in their information and determine which exposures require closer monitoring.

The process is useful even when the scenarios do not accurately predict future events.

Scenario analysis helps insurers identify missing information, assess potential concentrations of risk and determine what additional data should be collected from policyholders.

Turk emphasised that insurers cannot reliably predict every geopolitical development.

The value of scenario modelling lies partly in the discipline of examining possible outcomes and understanding how different events could affect insured portfolios. “We won’t necessarily get the scenarios correct,” she said, acknowledging the limitations of forecasting geopolitical events.

Nevertheless, working through potential scenarios can reveal which assumptions are uncertain and where further data collection is necessary.

Lloyd’s sees scenario development as a way to improve the interpretation of existing exposure data, rather than a method for predicting geopolitical conflicts with certainty.

This approach can support underwriting decisions where the frequency, severity and geographic scope of potential losses remain difficult to estimate.

Hybrid warfare and state-backed cyberattacks challenge insurance contracts

Turk also discussed the difficulty of applying traditional war exclusions to modern hybrid conflicts and cyber operations.

Conventional insurance definitions of war were developed around military confrontation, including armed forces crossing national borders.

Such definitions may not adequately address cyberattacks, state-sponsored disruption or other hostile activities that occur without conventional military engagement.

Turk referred to Jaguar Land Rover’s identification of a cyber incident as state-backed, describing the development as significant for the insurance industry.

She argued that these incidents demonstrate the relevance of dedicated cyber war products for businesses exposed to state-sponsored attacks.

Traditional war definitions based on conventional military conflict may be insufficient for cyber operations and other forms of hybrid warfare targeting businesses and critical infrastructure.

The increasing complexity of state-backed cyber threats also creates challenges around how insurers establish the circumstances in which war exclusions apply.

Policy language must reflect the nature of contemporary attacks while maintaining clarity over the boundaries between conventional cyber insurance and war-related protection.

Turk said insurers have been updating contract wording over approximately the past decade to address these developments.

Lloyd’s expects insurance policy wording to continue changing as hybrid warfare and state-backed cyber incidents challenge definitions established for earlier forms of conflict.

She indicated that further adjustments will be necessary as the methods used in geopolitical conflicts evolve, particularly where commercial organisations and infrastructure become targets of hostile state activity.

…………………

EXPERT: Rachel Turk – Nominated member of the Council, Chief of Performance & Strategy at Lloyd’s, Chair of the Underwriting Advisory Panel

by Yana Keller – Re/Insurance Editor at Beinsure