Tension in the Middle East could drive down insurance premium volumes, with Marine Cargo, Marine War, Aviation Cargo, Aviation War, Political Risk / Violence and Trade Credit insurance being the classes that most likely would be impacted , according to a recent report by actuarial consultancy OAC, part of the Broadstone Group.
The political climate across the Middle East remains volatile. The ongoing attacks off the coast of Yemen are affecting marine insurance and shipping costs.
Vessels are avoiding several shipping routes and are being redirected, which results in less efficient trade routes, adding to the cost of marine war premium rates.
Political analysts are highly concerned about the risk of a direct conflict with Iran. Should this occur, the chances that the conflict would impact energy markets through global oil supplies are highly likely – even though Iran is heavily sanctioned, it is still a significant supplier of oil to the global energy market, according to the report.
“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,” analysts explain.
Adding: “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.”
With analysts widely agreeing that there is a high risk that the current conflict may spread, the OAC Insurance Risk Monitor report, also highlighted this could also affect the aviation insurance market, mainly due to air travel disruption.
Continued conflict in the region could lead to 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.
The result would be a lower demand for long distance air travel, with lower passenger numbers and number of flights.
Under this scenario, the report stated, “premium volumes in the aviation market are expected to decrease reflecting the reduction in exposure.”
Analysts add: “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.”
Bharat Raj, Head of London Markets at OAC, commented: “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.”
According to the report, a number of insurance classes would be impacted, including: Marine Cargo, Marine War, Aviation Cargo, Aviation War, Political Risk / Violence and Trade Credit.
Raj said: “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.”
