The impact on reserve adequacy and uncertainty for insurers
Ongoing political, economic, military and regulatory developments have heightened geopolitical risk, creating significant implications for insurers and their reserve estimates, in particular. Reserve estimates may be subject to increased uncertainty arising from geopolitically driven major loss events, inflation and economic volatility, supply chain disruptions, sanctions and discounting effects. Large insurance carriers regularly report on ongoing geopolitical tensions, impacts to loss trend assumptions and establishment of inflation loads in reserves. For example, Lloyd’s reported a preliminary net loss estimate of £1.4bn arising from the Middle East conflict and prior-year reserve strengthening from updated Ukraine loss estimates in its 2026 half-year result, and The Bank of England PRA highlighted cyber risk as being elevated due to the geopolitical risk environment in their 2026 insurance supervision priorities.
With no end to the current geopolitical upheaval in sight, how should insurers respond?
Impact of geopolitical risk on non-life insurance reserves
Heightened geopolitical risk is occurring against a backdrop of deteriorating loss trends, thinning reserve margins, and a softening market.
As reported in the Commercial insurance soft market 2026: Risks, trends & strategy article in Insurer Update’s June issue, there are three distinct shocks impacting the market namely, the ongoing wars, supply chain blockers and tariff uncertainty.
Russia’s full-scale invasion of Ukraine in 2022 and the 2026 Middle East conflict are significant loss events, directly affecting lines of business including marine, political violence, terrorism and aviation. Coverage disputes, sanctions and operational constraints can delay claim payments, reinsurance collections and final settlement, increasing uncertainty over both the amount and timing of ultimate losses.
Beyond the direct impact of the wars, knock-on impacts to supply chains and inflation, together with tariff uncertainty, further add to the cost of losses and settlement delays. Changing economic growth and insureds trading volumes have an impact on exposure, premium volumes and demand for insurance. Increasing interest rates also impact the discounting assumptions applied in reserving, with a stronger impact in longer-tailed lines of business such as casualty.
Historical assumptions may not be a good guide to the future and dependencies may change.
Considerations for reserving and risk management
While insurers cannot allow for every single potential geopolitical risk, the best estimate reserves need to allow appropriately for related uncertainty; they need to document and demonstrate that assumptions are appropriate and that uncertainty is adequately allowed for in reserves.
Insurers need to be ready to respond to events. Using a pre-agreed major events protocol, ensuring claims, reserving and regulatory responsibilities are appropriately considered, is a good way to be prepared. Regular monitoring and testing of assumptions are important; impacts can evolve and build over a period of time. Actuarial and business assumptions need to be revised to respond to changes in geopolitical circumstances.
Future geopolitical risks are difficult to accurately predict, and there is a significant number of different low probability / high severity potential outcomes. Insurers should address material uncertainty through their ORSAs, and the PRA expects them to assess the effects through appropriate downside scenarios. Lessons learned from historical events can help to prepare for the next event by providing feedback that enables insurers to adapt current analysis, governance and processes.
Five actions to strengthen reserve adequacy
- Establish and maintain a major-events protocol to ensure the business can react and take timely action on reserving, underwriting, claims, reinsurance and risk management. Incorporate lessons learned from historical events
- Document assumptions and expert judgments for reserve loadings. The parameterisation of any loadings to reserves will be uncertain due to sparse data. Loadings and allowance in reserves for uncertainty need to be clearly articulated and debated with reserve committees, senior management and boards
- Maintain reserving rigor and effective controls. Analyse the forward-looking loss trends, be responsive to changes in geopolitical circumstances and the knock-on impacts such as changes to inflation. Stress test reserves at the class level as aggregate adequacy can mask significant deterioration
- Apply consistent challenge across the actuarial function, underwriting and claims teams that ensures best value from different experts across the business and actuarial function
- Softening markets can encourage both changes to terms and conditions and growth into low frequency/high severity markets; underwriting discipline and long-term adequacy needs to be protected and risk appetites carefully met to reduce the risk of surprises from geopolitical events and knock-on consequences. The insurance market is navigating a period of prolonged geopolitical risk. The carriers that chart a course through this phase most effectively will be those that succeed in maintaining discipline, invest in rigorous reserving processes, and demonstrate effective controls and risk management. These actions will also enable auditors, regulators, policyholders and investors to have confidence in the business.
Speak to our insurance actuarial experts
Our Insurance Actuarial team works with carriers, managing agents, and Lloyd’s syndicates on reserving analysis, pricing and underwriting reviews, board-level reporting and training. For further information, please contact Pauline Khong or Paul Goodenough.
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