Europe is underestimating civil unrest, insurers warn

Europe’s insurers and reinsurers have reported the risks that are top of mind for their clients in 2023. In spite of the continent’s geopolitical landscape, the most underestimated threats are political, according to industry experts. 

Last month, Allianz Global Corporate & Specialty (AGCS) released its 2023 Allianz Risk Barometer. In some ways the report predictably reads like an ode to the fallout of ongoing war in the Ukraine.

The energy crisis leaped from being non-existent into third place, while "trade wars, sanctions and protectionism" took fifth place under the umbrella risk "changes in legislation". And yet, scraping in at 10th place beneath the risks of fire and shortage of skilled workers, was "political risks and violence".

“When I look at this year’s rankings, there are certainly blind spots for me. If I were thinking about risks that are ranked quite low, but are important, I would have to say ‘political risks and violence’ is the main one,” AGCS chief analyst, Ludovic Subran, said in a webinar announcing the barometer results.

An all-new entrant in the top 10, the AGCS report identified this as “political instability, war, terrorism, civil commotion, strikes, riots, looting”.

“For the past two years, civil unrest has been heightened in Europe. Previously, it was related to Covid and Covid restrictions. Now, it’s the cost of living, and it speaks to the breadth of the effects across Europe,” said Markus Korhonen, senior associate at consultancy S-RM, which produces insight intelligence for insurers and reinsurers.

And, incredibly enough, it is precisely these threats that Subran is convinced are the single most underestimated (and underinsured) risks for 2023.

'For the past two years, civil unrest has been heightened in Europe. Previously, it was related to Covid and Covid restrictions. Now, it’s the cost of living, and it speaks to the breadth of the effects across Europe'

^{Markus Korhonen, S-RM}

“The war is already here, so companies do not see it as a top risk as they have started triggering their coping mechanisms,” Subran explained when asked for further comment by Insurance Day. However, he added that this is a deeply incorrect assumption as the Ukraine conflict has caused “a cost of living crisis, which in many countries will certainly trigger more social grievances.”

S-RM, which produces all of specialist reinsurer Axa XL’s market insights, released a Political Violence Flash Points map on January 25, and it seems to confirm this view.

“Ongoing tensions, both at global and national levels and across a broad range of issues, continue to drive political violence threats – including war, terrorism and civil unrest,” said Korhonen when the map was released. 

According to Korhonen, the war in Ukraine has caused an estimated $136bn worth of infrastructure damage in eastern Europe – but this number could be far higher. Meanwhile, 2022 saw a 26% increase in protests in Turkey, more than 700 union strikes and cases of civil unrest where the high costs of living were being protested in France, and roughly 200 demonstrations in 2022 (compared to only two in 2021) in Italy, where civilians protested the exorbitant price of fuel.

While these are undoubtedly the effects of Putin-adjacent politics, some might argue that they are also partially attributable to reinsurers themselves. On January 1, 2023 we saw the customary policy renewals (or the lack thereof) with reinsurers. Reinsurers announced exclusions on shipping and plane coverage for the Black Sea region across the board, and duly many insurers announced they would not be providing political risk cover of any sort in the region. This was on the back of the fact that shipping costs skyrocketed in 2022 and had only just started moderating.

Rating agency Fitch Ratings subsequently predicted that reinsurers’ underwriting margins are likely to expand by four percentage points on average in 2023 because of significant price rises, tighter terms and conditions and the withdrawal of cover related to the war in Ukraine. "Prices were particularly steep for specialty reinsurance cover. Among specialty lines, political risk and aerospace saw large price increases driven by losses from the war," Fitch said. 

It was this – the industry increasingly becoming enmeshed in geopolitical rumblings – that caught Subran’s attention. “I think it is looking like insurance is getting increasingly political because of the Ukraine conflict, and because a lot of the world’s bigger insurers and reinsurers are in Europe,” he told Insurance Day.

“The war in Ukraine has called on reinsurers and insurers to reaffirm their value compass. A lot of those decided to stop operations in Russia and to not write new insurance business with Russian companies, because we condemn the attack on the Ukraine.

“The Western world’s financial providers have also decided to deglobalise Russia, and we’ve rarely seen such a huge amount of financial sanctions. As an economist, I was surprised by the speed of it. This doesn’t happen very often to this magnitude, at this velocity and this speed. In an environment that was this risky before the corollaries of that... For the sector it’s very hard to commensurate.”

And the effects have not only been felt “in the flesh”, as Subran puts it. On the data intelligence side of things, Korhonen says the industry is looking at an almost unprecedented interconnectedness of risk.

 'I think it is looking like insurance is getting increasingly political because of the Ukraine conflict, and because a lot of the world’s bigger insurers and reinsurers are in Europe. The war in Ukraine has called on reinsurers and insurers to reaffirm their value compass'

Ludovic Subran, AGCS

“From what we’ve seen over the past 12 months, events – most notably the war in Ukraine – have changed the conversation in terms of our [insurer] clients, but also industry trends. Political and geopolitical trends have entered consciousness and become real in a way that they hadn’t previously been. The knock-on effects of the Ukraine conflict are really broad, and geopolitical risk as something to keep an eye on is being recognised more than before,” Korhonen told Insurance Day.

“The general situation across Europe over the past months – not only the war, but also the various knock-on effects of it, related to costs of living crises specifically – perhaps haven’t been taken into account as much as they should have been,” added Korhonen.

AGCS highlighted cyber risk in particular – which was ranked the single biggest threat to businesses in 2023 by almost every region of the Allianz Risk Barometer.

“The terrible conflict in Ukraine and wider geopolitical tensions have created much more focus on so-called state-sponsored cyber attacks as war evolves in the way it is brought,” said Shanil Williams, AGCS chief underwriting officer corporate and board member. “Cyber warfare is certainly a big topic and concern for our large companies that operate on a global basis.”

Credit rating agency Moody’s Investors Services has commented on this too, noting in a March 2022 report that the ongoing war in Ukraine is amplifying “the risk of worldwide cyber attacks against critical infrastructure assets, along with a possible further escalation and increased frequency of cyber attacks against private companies and other organisations".

This makes policyholders’ potential underestimation of civil unrest all the stranger – and all the more dire. But what are the consequences of failing to perceive the danger that comes with increasing political violence?

“The most obvious cost relates to potential business losses,” Korhonen said. “But what’s interesting to see is the degree to which organisations and individuals are understanding the consequences of broader risk events. There, I think, the picture could be understood a bit better.”

This lack of getting the big picture could, of course, have real consequences for the industry – including potentially underpricing violence in Europe.

While Korhonen declined to comment on whether the continent’s insurers were likely pricing civil unrest correctly, he acknowledged that getting the pricing equation just right on such a volatile risk was no simple task.

“To provide accurate pricing, the necessity from the point of view of insurance is that they fundamentally understand the degree of risk. The only thing I can comment on is that, with anything outside of the ordinary – anything that isn’t car accidents or house fires – these are events that are a bit more uncertain and have more uncertainties built in. Understanding how they manifest and when is fundamental to that specialty risk," he added.