Insurers can no longer avoid the need to explicitly quantify geopolitical risk in their pricing, modelling and risk management processes, Broadstone has warned.

In its latest Insurance Risk Monitor, Broadstone said geopolitical risk is potentially the largest driver of tail risk for insurers in the current environment. It added that the likelihood of a global war is now potentially inside of the 1-in-200 year risk threshold for insurers’ capital requirements.

Broadstone said that a key first step to better understand and manage geopolitical risks is to undertake scenario analysis. The analysis, it said, will benefit from consulting with experts from outside of the insurance industry such as political analysts and security analysts.

It stated: “Actuarial techniques can be used to convert the subjective estimates from these discussions into more holistic probability distributions and calculate a potential range for the losses under each scenario. The scenarios can also be combined, for example using a correlation matrix approach, to provide a view on the aggregate value at risk to the business.

“Some key areas that will benefit from better quantification of geopolitical risk include the ORSA, business planning, reserving, pricing, capital modelling, exposure and aggregate management, model validation, reinsurance purchase and underwriting.

"These results can also be used to assess whether the insurer’s Solvency Capital Requirement calculation remains appropriate in the current risk environment.”

Broadstone insurance, regulatory and risk division, head of London markets, Bharat Raj, added: “The volatile geopolitical landscape at present is of huge global concern - especially the conflicts in Ukraine and the Middle East, which have been going on for a long period already.

"The potential deterioration between US and China relations also remains a significant risk.

“These are fast-moving situations with potential consequences that reach far beyond their borders and present a threat to economies across the world.

"Although direct losses from these events may be limited, for example through exclusions, insurers should not underestimate the potential knock-on impact on their businesses, which is likely to be material across all classes of business.”

This article originally appeared on our sister title, Insurance Asset Management.

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