General Insurance Article - Middle East tension may drive down insurance premium volumes

Attacks off Yemen coast already impacting marine insurance and shipping costs. Deterioration in the situation could spark further disruption in energy markets, air travel and global trade. Insurance classes mostly likely to be impacted include Marine Cargo, Marine War, Aviation Cargo, Aviation War, Political Risk / Violence and Trade Credit.

 OAC is launching its Insurance Risk Monitor – a regular update on the key developments and themes impacting the insurance market. The inaugural update focuses on the current tensions in the Middle East.

 The ongoing attacks off the coast of Yemen are affecting marine insurance and shipping costs. Several shipping routes are having to be avoided and re-directed creating less efficient trade routes and adding to the cost of marine war premium rates.

 The political climate across the region remains volatile, and political analysts are widely agreed that there is a high risk that the current conflict may spread. OAC’s Risk Monitor has considered some of the key risks to the insurance industry should there be a material deterioration in the current situation in the Middle East.

 A significant concern among political analysts is the risk of a direct conflict with Iran. Should this occur, it is highly likely to impact energy markets through global oil supplies – even though Iran is heavily sanctioned, it is still a significant supplier of oil to the global energy market.

 Any disruption to Iran’s oil production is likely to have serious ramifications on the global energy market. Crude oil supply to Europe and North America was materially affected by the restrictions recently placed on Russian energy sources.

 Significant loss of output from another major global producer would place further strain on an already fragile system. This is likely to lead to further inflation, potentially as severe as the inflation that followed the start of Russia’s invasion of Ukraine.

 Air travel – and therefore the Aviation insurance market – could also be significantly impacted through a further narrowing of existing conflict-free corridors connecting Europe and Asia.

 As flights have to take significantly longer routes, there will be upward pressure on air fares. This is likely to reduce demand for long distance air travel impacting passenger numbers and the total number of flights. Under this scenario, premium volumes in the aviation market are expected to decrease reflecting the reduction in exposure.

 Due to impact on shipping and aviation routes, there is also likely to be a decline in cross border trade that relies on these routes. Supply chains will be impacted and this will put pressure on costs across all areas of the global economy.

 At a time when global economies are hoping to emerge from inflationary issues and the economic pressures that arose as a result, this is likely to exert pressure anew. Insurance premium volumes, across pretty much all sectors and classes, would be likely to decrease.

 The most highly impacted insurance classes are likely to be Marine Cargo, Marine War, Aviation Cargo, Aviation War, Political Risk / Violence and Trade Credit.

 Bharat Raj, Head of London Markets at OAC, said: “Our Insurance Risk Monitor aims to track the biggest pressures on the global insurance market at a time of particular geo-political and economic uncertainty.

 “Since October, we have seen the situation in Israel and Gaza slowly spread into other countries, including unrest off the coast of Yemen. There is an increasing risk of further escalation.

 “The worry will be a further spread of conflict throughout the region driving more involved, prolonged involvement of Western militaries. Just as global economies are recovering from the inflation shock after the Ukraine invasion, an escalation of conflict could once more send cost rises rippling through the world, dampening growth.

 “Aviation and shipping insurance markets are already seeing ramifications and these classes are likely to be worst impacted by escalating tensions. Going forward, it is essential for insurers to consider the plausible future scenarios and how these scenarios may affect their experience.

 “Consideration should also be given to the impact on business plans, capital model assumptions, premium rating, underwriting decisions and risk management.”

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