Political Risk in 2024: tensions rise as US election looms – HIVE

“There are decades where nothing happens and there are weeks where decades happen”. It might seem strange to start an article on insurance with a quote from Lenin, but over the last few years, those words have felt very apt.

Whether it is war in the Middle East and Europe, rising temperatures in East Asia, increasing political division amongst societies around the world, global trade upended by tariffs, sanctions or violent attacks in the Red Sea - the world is increasingly riven by conflict of one form or another.

The Uppsala Conflict Data programme recorded the most state-based conflicts since the end of the Second World War in 2023, and the Allianz Political Violence report, released earlier this year, highlighted the dramatic growth in civil unrest around the world. Navigating these waters as underwriters of political risk has not been this perilous for some time.

The upcoming US Presidential elections crystalises many of these issues. Foreign policy, and the role the US should play in the world, are at heart of many of the debates.

Funding for Ukraine and Taiwan, US commitment to NATO, involvement in the Middle East, and so on, are topics that crop up again and again with potentially seismic consequences. And, of course, the polarisation of the US political debate presents its own, considerable, political risk in the form of potentially violent disorder.

The United States is grappling with how to keep order - if indeed it still wants to - in a world where the relative power of it and its allies is decreasing. According to the IMF, in 2004, the G7’s share of world GDP, adjusted for purchasing power parity, was 40% and the US alone a little under 20%. By 2024, those numbers are 30% and 15%. In addition, the US - for so long the linchpin in international security - is stretched thin and diminished resource means making tough decisions as to where to best utilise that capacity. Concurrent geopolitical challenges, like the ongoing conflicts in Ukraine and the Middle East, are stretching those resources more than ever before.

This is all before considering the challenge presented to the United States by China, where the relative economic, military and technological gaps have been fast-closing or indeed have opened up to the US’ detriment. For instance, data made public by the US Navy estimates China’s shipbuilding capacity at circa 230 times greater than that of the United States – a frightening statistic in the context of a possible US-China conflict that will chiefly be fought at sea.

As insurers, there is substantial focus on potential exposures to such a conflict. Bloomberg at the start of 2024 estimated the potential cost of war over Taiwan to be as much as $10 trillion, or 10% of global GDP, sizeable chunks of which will be insured in one form or another. Exposures are, perhaps perversely, also growing with US investment inflows into Taiwan increasing 13% since 2021, an interesting contrast to the political rhetoric.

No doubt, China will occupy much of American attention in years to come. In this context, politicians of all stripes, but particularly those on President Trump’s side of the fence, have been calling on US allies to share more of the burden elsewhere across the world. The stick that the US carries is that it could look to withdraw security guarantees, or perhaps even from NATO itself, if commitments are not met. Whilst President Trump, and presumptive key individuals in a second Trump term, have been banging this drum most loudly, the Democrats are also asking allies to do more.

This is not just abstract political debate. A recent report by the Center for Strategic and International Studies examined possible election outcomes for US allies and enemies alike. One alarming conclusion was that a more isolated, insular United States, which withdraws its support for key allies such as South Korea or Japan, could lead to rapid nuclear proliferation. It is not hard to imagine, for example, that South Korea in particular, shorn of US support and faced by its implacably hostile, nuclear-equipped neighbour to the north, might seek its own nuclear weapons and this is a live issue in South Korean politics.

Whilst it is possible to be highly critical of US foreign interventions, and with good reason, it is clear that an absence of American leadership is worse – the devastation of Syria, the tragic scenes from Afghanistan, and the start and potentially end of the Ukraine war all owe something to a reduced American willingness to spend blood and investment upholding the rules they and their allies crafted so carefully in the wake of the Second World War. As we have seen with Russia, predatory nations are willing to gamble much to reshape parts of this world, confident they can outlast a divided West.

Underwriters should follow these arguments and wranglings in US political discourse carefully. That rise in conflict documented by the Uppsala programme is already appearing in our loss ratios. Just as insurers of property should be clear-eyed in their views on climate change, so should political risk insurers be live to the changing role of the United States in the world and the attendant consequences.

Managing exposures, carefully designing policy wordings and future-proofing portfolios against unexpected events has never been more critical. Political risk in all its forms is not for the faint-hearted, and it is only robust, knowledge-led underwriting that will see us through this period of sustained challenge.

By David Langran, class underwriter, HIVE Underwriters