Stormy Skies: How Banking and Insurance Are Affected by Global Tensions

Banking, Insurance, and the Global Risk Landscape

In 2022, the war that took place between Russia and Ukraine caused numerous problems for the world economy. Oil prices surged gradually, leading to inflationary pressures across many countries. In response, several nations enforced strict economic sanctions on Russia, forcing banks to quickly reassess their operations, compliance protocols, and exposure to international markets. At the same time, rising tensions in the Middle East and the growing strain between China and Taiwan further worsened the geopolitical landscape. As a result, the global situation became increasingly unstable and unpredictable. These uncertainties forced financial institutions to tighten risk management frameworks, increase their capital buffers, and prepare for market volatility, while insurance companies faced mounting claims and struggled to reassess geopolitical risk coverage in their portfolios.

 

Geopolitical instability :

When a nation or region is dealing with major issues like conflict, political disruptions, or tensions with other nations, it is said to be in a state of geopolitical instability. These issues create uncertainty and can impact safety, peace, and the way individuals or organizations function. For businesses, it often leads to disrupted supply chains, fluctuating currency values, and reduced investor confidence. Financial markets tend to react sharply to such instability, and companies operating globally may face increased costs, regulatory hurdles, or even forced exits from certain regions. In extreme cases, it can also impact energy prices, trade routes, and international alliances, altering the global economic balance.

 

Impact on Banking sector :

Geopolitical instability can cause serious problems for banks. Here are some of the key ways it affects them:

 

1.      Credit Risk

When there is political conflict or war, supply chains can get disrupted, meaning businesses may not get the materials they need to operate. As a result, some companies may lose money and struggle to repay their loans, which increases the risk for banks. This can lead to a rise in non-performing assets (NPAs), forcing banks to set aside more provisions for bad loans, ultimately affecting their profitability and balance sheet strength.

 

2.      Liquidity Crunches

During unstable times, people may get worried and take out a lot of money from their bank accounts. This can make it hard for banks to keep enough cash on hand, leading to a shortage of money that’s ready to use. This situation is called a liquidity crunch. Additionally, interbank lending may slow down as trust declines, and central banks may be forced to intervene with emergency liquidity measures to stabilize the system.

 

3.      Market Volatility

Wars, sanctions, and political problems can cause stock prices and currency values to change quickly and unpredictably. This is called market volatility, and it can hurt banks by reducing the value of their investments and other financial assets. Sharp fluctuations in interest rates and foreign exchange markets also impact trading operations and can result in unexpected losses, especially for banks exposed to international markets.

 

Impact on Insurance Sector :

1.      Higher Claims

In areas where there is war or political violence, more people and businesses file insurance claims for damage or loss. This means insurance companies have to pay out more money, leading to higher claims. These increased payouts can significantly impact profitability and may even threaten the financial stability of smaller insurers. In some cases, insurers may face unexpected surges in claims related to property damage, business interruption, and even life insurance.

 

2.      Reinsurance Costs

When there is more risk around the world, like from wars or political problems, insurance companies have to pay more to protect themselves through reinsurance. This means their reinsurance costs go up. Reinsurers, in turn, may limit coverage or raise premiums, forcing insurers to pass on those costs to customers or reduce their exposure in high-risk areas. This can shrink their market reach and affect their pricing competitiveness.

 

3.      Underwriting Uncertainty

In unstable regions, like places with war or political conflict, it's hard for insurance companies to decide how much to charge for coverage. This is called underwriting uncertainty, because the risk is harder to predict. The lack of reliable historical data, rapidly changing threat levels, and political unpredictability make it challenging to assess risk accurately. This often results in either overly cautious pricing or the withdrawal of insurance products from certain markets altogether.

 

Conclusion:

Banks and insurance firms are significantly impacted by geopolitical instability, which includes wars, political disputes, and international tensions. It makes it more difficult for these financial sectors to run efficiently, raises risks, and produces uncertainty. Effects can be severe and extensive, ranging from an increase in loan defaults and market fluctuations to a rise in insurance claims and pricing difficulties. Banks and insurers must remain alert, make plans in advance, and come up with clever ways to manage risks as the world continues to face new obstacles.

 

Building robust risk management frameworks, investing in advanced data analytics, and staying compliant with international regulations can help these institutions navigate turbulent times more effectively. It is easier to see why strong, adaptable financial systems are more crucial than ever when we consider how events around the world impact these industries. In a world where crises can emerge overnight, resilience, agility, and proactive planning are no longer optional—they're essential for long-term survival and growth.

--- Team ELPL