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Monte Carlo 2022

War in Ukraine ramps up risk

Aerial view of combine harvesters on wheat field.

As the world faces an onslaught of perils – from potential food and energy crises to inflation and political instability – much of the blame is being traced back to Ukraine.

Laura Burns, Willis Towers Watson’s Washington-based risk product leader for the Americas, describes the war in Ukraine as “front and center” on the international risk landscape. “I think that this is quite an inflection point in terms of world affairs,” she says.

Burns says a possible food crisis is “probably one of the biggest threats we see at the moment.” She points out that the price of bread has sparked eruptions in advance of such key historical events as the French and Russian Revolutions and the Arab Spring in 2011 – and with Ukraine’s history as one of the world’s main agricultural areas and its established role as a supplier of wheat to the Middle East and Africa, the conflict could well lead to unrest beyond the borders of Europe.

WTW, Burns says, is also monitoring such issues as tension between China and Taiwan, inflation, climate change, the growing scarcity of water in some countries, the pandemic, and a “backsliding of democracy” in Africa.

“I think all of these things are going to conflate in making political risk even more sharp in the coming days and years,” Burns says.

Lachie Brown, who heads up one of RSA’s UK risk consultant teams, is concerned that the United Kingdom may be exposed to “a perfect storm of issues” as winter sets in. He also cites the war in Ukraine, blaming the conflict for inflation, the energy crisis, and supply chain disruptions. Brown agrees that a particular worry will be Ukraine’s continued ability to deliver grain into global markets, particularly through the port of Odessa.

The issue of energy, and the ability of consumers to pay for it, may begin to be felt acutely around October and November, says Brown, who fears a looming crisis of fuel poverty among British pensioners.

Roddy Barnett, London-based head of political and trade credit risks at Beazley, agrees on the seriousness of the threat from the Ukraine war, noting that Russia’s attack on its neighbor has demonstrated that a permanent member of the United Nations Security Council “is clearly not conforming with the norms that we’ve perhaps got too used to.”

The upward pressure on prices for energy, food and fertilizer caused by the war, Barnett says, has had a particularly damaging effect on strained economies that are dependent on energy imports. He cited the ousting, amid economic crisis, of Sri Lankan President Gotabaya Rajapaksa. “It’s wider than Eastern Europe,” Barnett says of the war.

Barnett says climate change offers a “fairly serious’ threat in the medium term. He cites the potential impact on water resources in the Middle East, suggesting the likely effects of governments to respond to the problems that are presented to them.

Brown also voices concern about the threat of political instability in the United States and says this year’s mid-term elections will provide a sense of the future direction of the country.

Additionally, the world will have to deal with the uncertainties created by the rise of China, Brown says. And not only does Covid remain a threat, he says, but the spread of monkeypox points to the potential dangers of emerging viruses. There is also the possibility, Brown says, that new political worries could arise from the Middle East, particularly involving Iran.

Brown, who regards threats to supply chains is the biggest issue facing corporate insurance clients, says companies are protecting themselves by looking at alternative energy sources. One option, he says, is solar power. Not only does solar provide welcome supply chain diversity, he explains, but it can do much to burnish a company’s green credentials.

Disruptions to supply chains, Brown says, can point companies toward the use of larger warehouses, a step that would suggest closer engagement with insurers to manage increased risk. Brokers, with their risk management expertise, can have an important role in this conversation, Brown says, noting that the focus will be on business continuity. Brokers and their clients, he says, should be adept at supply chain analysis and the ability to manage contingency arrangements.

WTW is seeing political unrest in places that had historically been regarded as stable, Burns says, mentioning Hong Kong and Chile. “The past is in a way an indicator of the future,” she says. “And I think we are in for a much bumpier road.”

Faced with such uncertainties, Burns says, multinational companies need to manage their risk exposures proactively. Civil unrest, Burns warns, could potentially topple governments.

WTW, Burns says, has received a flood of inquiries about political risk in China and other parts of the world. Many companies, she adds, are turning to insurance-based strategies.

Political risk can be managed to a degree, Burns says. WTW, for instance, counsels clients in such areas as portfolio diversification, corporate social responsibility, and government relations. It is important, she explains, for a company to deal effectively with a regime, but not be so close as to be regarded as a crony.

There are 50 to 60 insurers that write political risk cover, at “fairly large limits,” Barnett says. “The market’s grown quite significantly in the last 10 to 15 years.”

Barnett believes brokers play an important role in promoting an awareness of risk management among insurance clients. Beazley, he says, relies on a small panel of political risk brokers.

Risks, Barnett says, may be associated with war and political violence and expropriation of property by governments, and the possibility that investments may be trapped in an overseas market.