Fundamental change needed to address geopolitical risk gap

Published in: Risk, Risk management, Risk Models, Associations, UK

Companies: University of Cambridge’s Centre for Risk Studies, Lloyd’s of London

The insurance industry has proven to be “pretty adaptable, flexible and creative” and those qualities will be needed to the address geopolitical protection gap, according to Andrew Coburn, chief scientist at the University of Cambridge’s Centre for Risk Studies.

In an interview with InsuranceERM, Coburn said the industry is limited by its policy structures and certain conventions, and the “next evolution” of insurance is to “move beyond those policy constraints”.

He noted the insurance industry has struggled to protect against supply chain disruptions and disruptions to business process – as highlighted by the Covid-19 pandemic, where many policyholders struggled to receive payouts from their business interruption cover.

In a report for Lloyd’s of London, published this week, Coburn described how geopolitics is set to become “more idiosyncratic and unpredictable” in the short term, heightening the threat of societal destabilisation, which will affect markets and businesses.

The insurance industry needs to respond to that change, he said.

“It's fairly clear that the demand from the companies we work with - and highlighted in the report - is for protection of business activity, rather than physical assets which are owned by businesses. So, there is a paradigm shift that is really needed by the insurance industry to truly address the risk concerns of businesses going forwards.”

Coburn also said modelling of geopolitical risk needed to be improved for insurers to understand the risk better.

“They [insurers] are very uncomfortable about things where there is no historical basis from which to set pricing.”

This would take time to develop, but the industry has a good track record with developments in hurricane modelling, for example.

“Terrorism would be another case in point where, after 11 September 2001, there was no actuarial basis to underwrite terrorism risk. But terrorism risk modelling helped out and provided a market. So, I'd like to say models made [the] markets. You need good geopolitical risk models in order to underpin for insurers to be comfortable,” he said.

The report examines 10 geopolitical scenarios, along with their degrees of severity and probability. It also suggests actions that businesses could take to address these geopolitical risks.

Cintia Cheong