[Finance Microscope] The Two Faces of the Insurance Industry Amid War

Global Geopolitical Tensions: 'Crisis and Opportunity' for Insurers

Middle East: Marine Insurance Paralysis Spreads Risks

Europe: Rising Interest Rates and Defense Investment Opportunities Emerge

In the aftermath of the war involving Iran, the marine insurance market has effectively ceased to function, leading to soaring insurance premiums and a contraction in the reinsurance sector, further spreading risk. In contrast, in Europe, the expansion of defense spending and rising interest rates are converging to create new opportunities for insurance companies in terms of asset management.

According to the financial sector on March 25, the blockade of the Strait of Hormuz has persisted following airstrikes by the United States and Israel against Iran, resulting in ongoing stagnation in the marine insurance market. With the United Kingdom Maritime Trade Operations (UKMTO) reporting a series of merchant vessel attacks and hundreds of ships stranded near the strait, some private insurers are halting new underwriting, seeking to reduce their risk exposure.

Under these circumstances, war risk insurance premiums—designed to cover special risks such as war and terrorism—have surged in a short period. While premiums previously stood at 0.1–0.2% of vessel value prior to the conflict, they exceeded 1% in the early days of the war and have recently soared to around 5%. For a tanker valued at 100 million dollars, this translates to an insurance premium of up to 5 million dollars per voyage.

As the functionality of marine insurance has rapidly diminished, cases of government intervention have emerged. The U.S. government is partially absorbing maritime transport risk by operating a 20-billion-dollar public insurance program centered on the global insurer Chubb. This signals the limitations of the private insurance market’s capacity to respond.

The contraction of the reinsurance market is also a growing concern. Reinsurers, who had already adopted a conservative stance due to rising claims from natural disasters, are further reducing their underwriting capacity by factoring in Middle East risks. Rising reinsurance costs are ultimately passed on to primary insurers, and since it is difficult to immediately reflect these increases in insurance premiums, this can lead to diminished profitability for insurance companies.

Additionally, heightened volatility in global financial markets is increasing the risk of valuation losses on bonds and stocks held by insurers. If currency instability is also present, the burden on insurers with a high proportion of foreign currency assets may become even greater. In particular, for life insurers holding long-term liabilities, declining asset management returns could translate into a deterioration in their solvency ratios. Kim Jinok, Senior Research Fellow at the Korea Insurance Research Institute, stated, “For Korea, where energy dependence on the Middle East is high, the blockade of the Strait of Hormuz will inevitably worsen the loss ratios of marine cargo insurance and energy insurance. Domestic insurers need to review their Middle East-related underwriting standards, update war exclusion clauses, diversify reinsurance partners, and adopt a more defensive approach to managing foreign currency assets.”

Expansion of Defense Spending and Rising Interest Rates... Growing 'Investment Opportunities' for Insurance Capital

On the 19th (local time), destroyed Ukrainian military equipment remained in Donetsk Oblast, Ukraine. Photo by TASS Yonhap News Agency

War does not only create burdens for insurance companies. Some analysts point out that it is also generating new investment opportunities for insurers.

A representative example is the Russia-Ukraine war that began in 2022. Following Russia’s invasion of Ukraine, European countries, amid concerns that military tensions could spread to Western Europe, dramatically increased their defense spending. As a result, sovereign bond issuance expanded, increasing fiscal pressure. In response, major European countries began to channel private long-term capital into the defense industry and dual-use infrastructure investments. Life insurance and pension funds became key targets for these investments. Some countries, such as France, are promoting the introduction of defense-themed funds that can be included in life insurance accounts, and are also working to build related investment ecosystems through public investment banks. For insurers, this is opening up new investment avenues for securing stable long-term sources of income.

As defense spending grows and sovereign bond issuance rises, the increased supply of bonds in the market leads to upward pressure on interest rates—another positive factor for insurers. Since insurers manage a significant portion of their assets in bonds, higher interest rates mean greater yields on new investments and reduce the shortfall experienced by policyholders when returns on legacy low-yield assets fail to meet guaranteed rates. At the same time, higher discount rates for liabilities reduce the present value of insurers’ obligations, thereby improving capital adequacy.

Kang Yoonji, a Research Fellow at the Korea Insurance Research Institute, explained, “The rise in interest rates resulting from increased defense spending across European countries can boost insurers’ reinvestment yields in sovereign and high-quality bonds, thus positively impacting profitability and soundness. However, in the short term, volatility in capital ratios may increase due to mark-to-market losses on existing bond holdings, and if ethical controversies over defense industry investments lead to reputational risk, market uncertainty could also grow.”

This content was produced with the assistance of AI translation services.