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Insurance Faces Challenges from Geoeconomic Fragmentation

by Celia

The global insurance industry is grappling with increasing operational challenges, driven by a trend of “geoeconomic fragmentation” that has been accelerated by geopolitical tensions, the COVID-19 pandemic, and the ongoing Russia-Ukraine war, according to a recent report from the Geneva Association.

The report, titled Insurance in a Fragmented World Economy, highlights a significant shift away from the previous model of global economic integration, which focused on efficiency and growth through cross-border trade and investment. Instead, nations are now prioritizing national security and economic resilience, a change prompted by rising geopolitical risks.

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While full-scale deglobalization remains unlikely due to the enduring economic interdependence between countries, the trend toward protectionism is reversing the gains made over decades of trade liberalization. Foreign direct investment (FDI) has steadily decreased as a percentage of global GDP since the 2008 financial crisis, with geopolitical tensions only exacerbating this decline.

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The report notes that capital flows are increasingly confined within geopolitical blocs, resulting in a restructuring of global supply chains through strategies like “reshoring” and “friend-shoring.” These approaches, while designed to mitigate geopolitical risks, come with a downside—higher production costs, which could lead to increased inflationary pressures.

Further complicating matters is the fragmentation of technology transfer, which is hindering innovation and productivity across economies. Estimates suggest that technological decoupling could reduce GDP by up to 5% in some countries over the next decade, and combined with the broader restrictions on trade and investment, these changes could lower GDP growth by as much as 12% in certain regions.

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The insurance industry finds itself at a crossroads in this evolving landscape, facing both heightened risks and emerging opportunities. Insurers must navigate an increasingly complex regulatory environment, as divergent national frameworks complicate global operations. Additionally, they are confronted with growing risks related to political instability, supply chain disruptions, and cybersecurity threats.

The challenges are especially pronounced for commercial and specialty insurers, who face greater exposure to political risks and the instability created by disrupted supply chains. These developments necessitate a recalibration of strategies within the insurance sector as it adapts to an increasingly fragmented global economy.

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