Geopolitical conflict could cost global economy $14.5 trillion over 5 years: Lloyd’s

The global economy could be exposed to losses of $14.5 trillion over five years due to the threat of a hypothetical geopolitical conflict causing widespread disruption to global trade patterns and supply chains, according to a report published by Lloyd’s , the insurance and reinsurance market. .

With more than 80 percent of the world’s imports and exports—some 11 billion tons of goods—at sea at any one time, the closure of major trade routes due to geopolitical conflict is one of the greatest threats to the resources needed for resilient development. economy, Lloyd’s said in its geopolitical conflict scenario – the fifth in its series of systemic risk scenarios.

“Understanding the vulnerability of shipping routes is critical to protecting economies in the event of disruption,” the report continues.

The economic impact of the geopolitical conflict scenario stems primarily from severe damage to infrastructure in the conflict region and the need to realign global trade networks due to the imposition of sanctions and the effects of compromised shipping lines, Lloyd’s said.

The impact on businesses would depend on the region they are located in and factors such as involvement in conflict, as well as reliance on international trade and goods that would be delayed or lost due to supply chain disruptions, the report continued. “Europe, for example, which depends heavily on other industrially advanced nations for supplies such as semiconductors for car and electronics manufacturing, could lose up to $3.4 trillion,” Lloyd’s said. (Editor’s note: Insurance journal provided links to pages of the report where the cited information can be found.)

“One thing is clear, when a crucial point in the supply chain is blocked, the effects are felt immediately and the ramifications can be long-lasting,” Lloyd’s said, pointing to the 2021 incident when the container ship Ever Given ran aground in Suez Canal, blocking international trade for six days.

“This single event stopped the flow of more than 12% of world trade flows through the region. The shock waves were felt long after the ship was refloated and continued its journey. Lloyd’s List estimated that Ever Given sustained $9.6 billion in trade for each day the channel was blocked and caused an estimated 60-day shipping delay,” the report said.

Lloyd’s said the sectors most at risk of geopolitical conflict are:

• MANUFACTURING – With a shortage of raw materials, producing countries may not receive payment for goods, and importing countries may not be able to use the materials to create new products.
• semi-conductor – No country has end-to-end dominance of the manufacturing and supply segments that result in finished semiconductor chips. Disruptions in the semiconductor supply chain can cause supply shortages and end-product price inflation.
• Health – Supply chain disruptions could prevent access to critical medical equipment that relies on global supply chains. Increased costs and reduced confidence could block investment in large projects and new equipment.
• Transport – Conflicts can affect the movement of goods, as ships and air transport are prevented from moving through the conflict zone. No-fly zones and sanctions can impede the movement of goods and people and cause shipping companies to lose revenue or shut down.

(Lloyd’s has provided a PDF document with key information from the scenario report.)

Lloyd’s said risk owners can take steps to insulate their organizations from the impact of geopolitical conflict, including:

• Data collection: Understanding the flow of goods in individual supply chains, how customers react, and how third parties affect an organization’s supply chain is a good way to understand where potential weaknesses and/or opportunities lie.
• Emergency planning: Broadening the range of suppliers, finding alternative locations for production and operations, and developing a redundancy system can help maintain business continuity. “Building strategic inventories where reasonable can also help mitigate the consequences of a ‘just-in-time’ supply chain failure.”
• Act responsibly: Global companies with teams in local hubs are responsible for supporting their staff and, to an extent, the wider community, Lloyd’s said, noting that there should be protocols in place for evacuation or ceasing operations in the event of geopolitical conflict.
• Resilience of the digital network: A regular regiment of offline or external backup processes can keep most information safe and up-to-date. “(Similarly), contingency and business recovery plans allow companies to find ways to conduct their operations while still offline, for example through another network server.”

Insurance as a safety net

Insurance can be a safety net amid the chaos and uncertainty of geopolitical conflicts, Lloyd’s said.

The value of the insurance extends “to aggravated secondary effects of geopolitical conflicts, including delays and downstream disruptions to affected trading partners and suppliers,” according to Rebekah Clement, Lloyd’s director of corporate affairs, in a statement. “Examples of insurance that can help companies protect against these impacts include political risk and contingent business interruption insurance, as well as dedicated war risk insurance.”

Lloyd’s recognized that war had long been regarded as an almost uninsurable risk. “War exclusion is almost as old as the insurance industry. However, companies and individuals facing a known risk could purchase a separate war risk insurance policy and, as demonstrated in response to the war in Ukraine, specific cover can be arranged through cross-sector collaboration to support the safe passage of vital exports and relief efforts.”

The report discussed some of the available hedges for geopolitical risk exposures:

• Political risk insurance. Assets and funds located in politically volatile regions may be vulnerable in the event of upheaval. Political risk insurance provides protection against losses from government actions such as expropriation, currency inconvertibility, confiscation, breach of contract and political violence.
• Credit insurance. Political unrest results in frozen funds, asset seizures and shipping delays, which can lead to non-payment or non-fulfillment of contracts by trading partners or suppliers. Credit insurance supports more than $3 trillion in global trade from losses caused by non-payment of trade debts, helping companies protect their capital and cash flow.
• Contingent Business Interruption Insurance (CBI). As businesses rely on other companies for raw materials, components or products, geopolitical conflicts create “a knock-on effect in the supply chain, especially if alternative suppliers are not available.” “CBI insurance protects businesses from the costs associated with reduced turnover, loss of profit and accrued expenses caused by disruptions from third-party suppliers or customers that affect the company’s ability to produce products or provide services as usual,” said Lloyd’s .
• War on land insurance. Assets located in conflict zones and land transport routes are vulnerable during geopolitical conflict, but there are solutions available, Lloyd’s indicated. “In May 2024, Willis Towers Watson partnered with Ukrainian insurer VUSO to launch the first London-backed unit to offer war insurance, providing critical cover and safety for companies transporting goods overland to Ukraine.” Lloyd’s said such cover helps “alleviate supply chain and trade stressors as goods are protected during their journey to their destination”.

The geopolitical conflict scenario report was produced in partnership with the Cambridge Center for Risk Studies. Other scenarios in the systemic risk series covered extreme weather events leading to food and water shock (July 2023), cyber attack (October 2023), global economic stagnation (January 2024), and volcanic eruption (May 2024).

Source: Lloyd’s

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