As pandemic fears recede, the world remains in a volatile state. The ongoing war in Ukraine, Russia’s weaponisation of commodities, a global economic slowdown and tense geopolitical relations between China and the West are creating a complex landscape for insurers and businesses. Jenny Messenger explores some of the key risks facing the credit and political risk market going into 2023.


Russia’s invasion of Ukraine has given rise to a whole host of far-reaching consequences for both underwriters and buyers of credit and political risk insurance, emphasising the close connection between economics and geopolitics. Grain and fuel shortages caused by the war, coupled with the overwhelming impact of Covid-related disruptions on global supply chains, have led to spiralling food and energy prices, with a bleak forecast for the year ahead.

Meanwhile, central banks are raising interest rates in an attempt to halt inflation, posing risks worldwide but presenting potentially devastating impacts for food security in emerging economies that could generate social unrest.

What is becoming clear is how interlinked many of these challenges are. An October report published by insurance company AXA points to a “new nexus of risks” – arising from climate change, geopolitical tensions and a troubled energy market – that has a wide-ranging influence on global economics. The Future Risks report, which canvasses a number of experts on the top threats facing the world over the next five to 10 years, finds that geopolitical risks have risen to second place in the rankings behind climate change, overtaking cyber and pandemic threats, which topped the survey in 2021.

Experts “expect geopolitical tensions to persist and spread around the globe”, while energy-related issues generated by the war in Ukraine are now in fourth place, up from 17th place last year. Fully 77% of those surveyed by AXA fear “a new era of global wars”.

Leaders consulted for the World Economic Forum’s (WEF) Executive Opinion Survey, published in November, also reveal “clear unease about economic headwinds against a backdrop of aggravated geopolitical tensions”, and geo-economic confrontation comes out as a top concern for executives in Europe, Central and East Asia and the Pacific.

Elizabeth Stephens, managing director of global political risk insight firm Geopolitical Risk Advisory, tells GTR that while there is a relatively strong western coalition against Russia at the moment, “there’s potential for that coalition to be undermined by economic reality” if fuel prices continue to rise and the risk of energy shortages grows. “In terms of economics, it is a perfect storm, and it’s unlikely to get better over winter,” she says.


Stagflation and debt crises return

An overarching concern for insurers is the threat of a global economic recession, which has prompted comparisons with 1970s ‘stagflation’ – a period of high inflation, slow economic growth and high unemployment. In October, a report by the UN Conference on Trade and Development (UNCTAD) predicted that global economic growth would slow to 2.2% in 2023, dropping from an estimated 2.5% in 2022 and falling far below the 5.6% growth rate of 2021. UNCTAD calls on advanced economies to avoid relying on increasingly high interest rates and austerity measures to curb price increases, but as of press time the Federal Reserve has continued to raise rates with the Bank of England following suit.

The WEF report cites inflation, mounting debt – particularly in emerging economies – and the cost-of-living crisis as top risks, while three economic risks also feature in the top 10 identified by experts in AXA’s survey: financial instability, macroeconomic deterioration, and monetary and fiscal stress.

As Stephens explains, it has been decades since western governments faced the problem of inflation. “If we take the UK and Western Europe in particular, governments in those countries haven’t had to deal with high inflation since the 1970s. Nobody in office now knows how to manage high inflation and high interest rates,” she says.

At the same time, the effect on developing countries is likely to be severe, particularly those with high debt levels and significant foreign exchange exposure, as many loans are dollar-denominated. With a steep increase in the cost of debt servicing, emerging economies are left in a precarious position. “It’s becoming a reckoning in many countries now how they’re going to service these debts,” Stephens says.

According to UNCTAD, levels of indebtedness are higher today than in the 1970s in developed and developing countries, which means that “many emerging economies are facing even tighter financial conditions against a backdrop of high debt”. Pointing out that 15 emerging and developing economies have had their sovereign debt downgraded this year, the organisation says that the Federal Reserve’s monetary tightening policy “has a considerable risk of triggering a new chain of financial crises” in these markets.

Specialist risk and intelligence consultancy Pangea-Risk highlights six African countries – Nigeria, Ghana, Zambia, Chad, Ethiopia and Kenya – likely to undertake debt restructuring by 2024 to avoid sovereign debt defaults. Across the continent, rising inflation, debt crises and food insecurity triggered by conflict are exacerbated by the effects of climate change, including drought, flooding and extreme heat, as seen in the case of the hugely destructive floods in South Sudan.

Racheal Tumelty, national head of credit, surety and political risks at Gallagher, tells GTR that Africa is “a major exposure” for the broker’s political risk insurance clients. “Governments are facing fiscal pressure as a result of Covid-19 and the war in the Ukraine, and cost-of-living increases causing stress among host communities,” she says. “Increasing security risks with hot spots in the Sahel and the Horn of Africa will continue to play out in the coming year.”

The situation is giving rise to a surge in food insecurity globally. According to an October update from the World Bank, food price inflation remains elevated in almost every country, fertiliser prices are still at historically high levels, and 20 countries now have food export bans in place for commodities including wheat, rice and sugar.

Food shortages can also be a trigger for social unrest, a risk that has been growing in 2022. Speaking to GTR, Shailesh Kumar, head of The Hartford’s global specialty insights centre, says the limited availability of food and fertiliser for crop-growing poses a specific challenge to emerging economies, because “the amount of money for every dollar earned, or equivalent currency, allocated to buying food is greater in emerging markets than developed”, he says.

“Historically, we have seen food inflation in select emerging economies as a catalyst for political violence,” Kumar says. This year, Sri Lanka, Ecuador and Iran have all seen food riots, and according to AXA, there were more major food and agriculture-related protests in the first half of 2022 than in the previous five years.


Deglobalisation ahead?

Geopolitical tensions between global powers have revealed weaknesses in the way the world trades. Now, the EU and the US are attempting to increase onshore production of goods to lessen their dependence on suppliers in Asia and China in particular. Experts surveyed by AXA are split on the question of deglobalisation, with 51% predicting a slowdown in globalisation over time as countries try to protect themselves against economic risks that stem from being part of a deeply connected global economy.

“What you’re starting to see is a little bit of a geographic dispersion taking place,” says Kumar. To take a well-known example, the shortage of semiconductor chips over the past two years, and the concentration of manufacturing in Taiwan, South Korea and China, have driven countries to reassess their reliance on just a few countries for chip production. “There are more and more announcements of semiconductor companies opening in the US. It’s going to take a few years for that to materialise, but that’s happening,” he says.

The war in Ukraine has further demonstrated how rapidly a country can be deemed off-limits, with companies rushing to extricate themselves from investments in Russian businesses due to fear of breaching sanctions or suffering reputational damage. “Within a week, it was just about impossible to transact business there, and that is unprecedented,” Stephens explains.

She adds that, when introducing sanctions, governments now assume companies will subjugate their economic interests to geopolitical objectives.

“The Securities and Exchange Commission actually expects large companies now to nominate one person on the board who is responsible for the implementation of sanctions, which means that if the company violates sanctions, the company can be prosecuted, and so can the individual,” she says.

This also brings in the question of reputational risk, which is becoming ever more critical as pressure intensifies on banks, insurers and businesses to demonstrate they are doing all they can to behave ethically or face public backlash. “For investors, the next question becomes, if Russia is now the pariah state, where next?” Stephens says. As geopolitical and economic competition increases between China and the US, investors will be keen to understand China’s role in the new world order.

“If the world continues to decouple, which countries end up in which camp? So far, countries like India have been able to sit on the fence over Ukraine, but the fence will rapidly turn into a spike and countries will be forced to choose,” she says.

Companies “now need to have a strategy for how they deal with the next conflict area and reputational issue”, she says, adding: “Russia has demonstrated the power of public opinion.”

As political risk underwriters and buyers alike prepare themselves for the year to come, it is clear that businesses will have to get used to contending with a web of interlinked risks, with geopolitics, sluggish economic growth and climate change all weighing heavily.


The future of CPRI

Despite a challenging 12 months for the credit and political risk insurance (CPRI) sector, there is cause for optimism regarding the health of the market itself. Although Zurich withdrew from the CPRI market last year, a survey carried out earlier this year by WTW shows that capacity remained constant or increased, thanks to an influx of new entrants and an increase in existing line sizes.

“I think we should be talking about how resilient the market has been. Ever since 2008, the political risk market has expanded in size, capacity and breadth,” says James Wilson, head of credit and political risk, UK and continental Europe at The Hartford.

Wilson adds that demand for political risk cover has, somewhat inevitably, increased in recent months. “When political risks become headlines, people want political risk insurance. Demand is up, but because this risk is an optional purchase, what we get is a lot of demand enquiry-wise, but that doesn’t necessarily translate into lots of buyers,” he explains. He expects a similar level of demand to continue into 2023.

Racheal Tumelty, national head of credit, surety and political risks at Gallagher, is also seeing greater demand. “Historically there were certain countries where clients or lenders would not require political risk insurance but that is now changing – South Africa is a classic example of this.”

A senior executive at a large bank, who requested to remain anonymous, says he has “a positive opinion regarding appetite and capacity found in the market in 2021 and 2022”.

In a contributed article published earlier this year by the Berne Union, Sian Aspinall, managing director of BPL Global, remained positive about insurers’ ability to deal with claims coming from the war in Ukraine, pointing to the overall credit quality of underwriters in the CPRI sector, the diversity of their portfolios and ongoing support from reinsurers.

In terms of current and emerging claims, Tumelty says that “the Russia/Ukraine crisis will be significant, particularly from a political violence and forced abandonment perspective and there are billions of dollars of potential notifications in the market”.

“We would anticipate price movement for standalone political violence policies,” she adds.

As more enquiries flood the market, does the product still meet expectations? “Political risk is mostly bought by corporates and private equity, while credit insurance is dominated by financial institution clients,” says Wilson.

GTR’s banker source agrees. “We as a bank never look for pure political risk insurance,” he says, explaining that it only covers specific events and there is no regulatory advantage to buying the cover in terms of capital relief.

He also explains that ‘pure’ political risk cover can lead to problems if a claim is generated. “There is the potential to get into litigation about the cause of the credit event,” he says. “Was it a political issue, or is it really a credit issue on the obligor’s side? What came first becomes an issue.”

And as the cost of capital rises, he argues rates should be reconsidered: “I believe we should review premiums so that the sharing is fair for the different parties,” he says.

Overall, though, it seems that the CPRI market is now at a scale where it can withstand the latest shock. “We’ve got sophisticated buyers who understand what they’re buying, sophisticated markets and sophisticated brokers, and we’re continuing to write new business,” The Hartford’s Wilson says.

“Even with lots of noise around potential future risks, I think the ability, willingness, capacity to support our clients during what could look like a difficult time is as good as it’s ever been,” he concludes.