Insurers innovate as geopolitical risks reshape trade

In an increasingly risky and complex world, marine insurers can sit at the forefront of innovation. 

Key points:
Marine risks very complex
Innovation needed across board
Parametric solutions to the fore

Rising geopolitical tensions, climate change and increasingly fragile global supply chains are creating risks traditional marine insurance products might not always address neatly. But for Emiel Paaij, head of marine – Europe at Markel International, that is precisely where the marine market has historically proved its worth.

“One of the things marine insurance is famous for is if one of the other traditional lines, like property or casualty, doesn't want to do it, it comes on the desk of a marine underwriter. A marine underwriter will think: ‘how can I find a solution for this?’”

Marine insurers have spent centuries adapting to changing patterns of trade and emerging exposures, often developing solutions for risks that do not fit comfortably elsewhere. Paaij believes that same instinct will be increasingly important as clients confront disruption ranging from conflict around key shipping routes to cyber threats and climate-related interruptions.

“One of the things marine insurance is famous for is if one of the other traditional lines, like property or casualty, doesn't want to do it, it comes on the desk of a marine underwriter,” he told IUMI Today. “And a marine underwriter will start thinking about: ‘well, how can I find a solution for this?’”

“All supply chains are based on just-in-time delivery. If there is a disruption, that means the whole production chain will fall apart. Those are the real risks.”

Problems to be solved

The need for that problem-solving mentality is growing. Most marine clients form part of complex international distribution networks, Paaij explained, making them particularly exposed when the movement of goods is interrupted. Current concerns around the Strait of Hormuz and Red Sea, alongside disruption affecting routes such as the Panama Canal, illustrate how events far from a company’s own operations can rapidly affect its supply chain.

“All supply chains are based on just-in-time delivery,” he said. “If there is a disruption, that means the whole production chain will fall apart. Those are the real risks.”

Climate change adds another dimension. Low water levels have previously affected inland shipping in Europe, restricting the ability of vessels to move goods from Rotterdam into the German hinterland, while the same has been seen in the Panama Canal.

Cyber threats sit alongside these physical and geopolitical exposures, creating an increasingly complex risk environment for companies whose operations depend on goods moving reliably across borders.

Paaij believes the question is whether businesses have examined the full range of potential scenarios closely enough. Regulatory developments in Europe are placing greater emphasis on companies understanding and mitigating their exposures, which in turn is likely to create greater demand for brokers and insurers to help find more innovative solutions.

The challenge is magnified by the geographical spread of today’s geopolitical uncertainty. “Geopolitical tensions have increased over the last two or three years,” Paaij said. “It’s coming more to the fore, and it’s not like one part of the world is at risk. Everywhere tensions are arising.”

No crystal ball

Some threats might not crystallise immediately. Political changes taking place today could alter trading patterns or exposures over the next five or 10 years, requiring clients and insurers to think in scenarios rather than simply extrapolating from existing loss experience.

That should encourage marine insurers to look beyond conventional asset protection. “Most of what we do involves helping clients protect their assets they have on their balance sheet, but we can and should begin to look at new products,” Paaij said.

One opportunity could be combining covers that have traditionally operated in separate silos. Paaij points to potential combinations of political violence and cargo insurance, or trade credit with commodity cargo business. Hull insurance might similarly be combined with an element resembling business interruption when geopolitical events prevent a vessel from operating.

Such precise products have yet to be determined. His point is that the market should start asking what clients need when traditional categories fail to capture the economic consequences of disruption.

Parametric insurance could form part of the answer. Rather than rely solely on physical damage, a product could potentially respond when a measurable event causes significant disruption. Paaij offered examples such as a vessel being unable to sail for more than 30 days because a port is blocked, or goods failing to arrive within a defined period because of a geopolitical event.

The important ingredient is metastability. If an insurer can understand an exposure, identify reliable data and attach a numerical value to the consequences, it might be possible to construct and price a solution.

“If, as a marine insurer, we can make sense of the data and quantify an exposure, we can build an insurance solution that gives clients the protection they need,” Paaij said. 

He sees scope for traditional and parametric protection to work together. Physical damage coverage could sit alongside a predetermined response to an associated interruption, effectively extending protection beyond the damaged asset towards its wider financial consequences.

“As long as we can understand it, calculate it, get some experience with it, we can combine those two,” he said.

If that sounds like a departure from traditional marine underwriting, Paaij argues that history suggests otherwise. Marine insurance has repeatedly evolved as commerce and society created new exposures. Early insurance markets in London and continental Europe were built around maritime trade before expertise expanded into other areas of risk.

Paaij points to the development of accident and health protection for seafarers and, later, property insurance as examples of risks that found their way to insurers accustomed to solving maritime problems.

That heritage matters because today’s challenge is again one of adapting insurance to a changing world. The difference is that modern underwriters have access to technology their predecessors could never have imagined.

“You can ask AI tools, and they will get better and better over time,” Paaij said. “Things that would take an underwriter or a person weeks to sort out can now take a couple of minutes. The phase of technology development we are in now is such an exciting time, specifically in the marine insurance world.”

For an industry whose history has been defined by finding ways to insure new and difficult risks, today’s uncertainty might therefore represent more than a challenge. It is also an opportunity for marine insurers to do what they have always done: understand how the world is changing and find a way to insure it.

Emiel Paaij is head of marine at Markel Europe. He can be contacted at: Emiel.Paaij@Markel.com

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