For those of us working in insurance, the events unfolding across the Middle East are a stark reminder of how quickly geopolitical risk can translate into real-world commercial consequences.
Having spent the last six years working in the Middle East, advising insurers and reinsurers on complex and high-value claims, Victoria Clucas and Bill Evans have seen first-hand how geopolitical events can affect businesses, infrastructure, supply chains and insurance programmes in ways that are difficult to predict — and even harder to contain once they begin.
There are many important lessons from the conflict for Australian businesses, insurers and reinsurers to reflect on.
Geopolitical risk is no longer a distant risk
Australia has historically been viewed as geographically removed from many of the world’s geopolitical flashpoints. That physical distance can create a perception that geopolitical risk is someone else’s problem. The conflict in the Middle East demonstrates why that assumption is increasingly difficult to sustain.
Conflict in one region can affect shipping routes, commodity prices, energy markets, construction costs, global supply chains and financial markets within a matter of days. Australian businesses can therefore be exposed to geopolitical events without having a single physical asset in the affected country.
In particular, energy markets are often the first and most immediate transmission channel. Disruption in the Middle East can rapidly influence global oil and gas prices, LNG availability, freight costs and downstream electricity pricing. For Australia — as both a major energy exporter and a domestically energy-intensive economy — these movements can flow directly into operating costs, project viability and insurance exposures.
For risk managers and boards, understanding these indirect exposures is becoming just as important as understanding direct physical risk.
Resilience needs to go beyond the first-tier supplier
One of the clearest lessons from recent events is the importance of understanding the full supply chain.
It is relatively straightforward to identify a critical direct supplier. It is much harder to understand where that supplier sources its materials, how those materials move around the world and what happens if a particular shipping route, port, energy source or manufacturing hub becomes unavailable.
The events of this year have shone a light on the interconnectedness of global supply chains and the reliance on a small number of key waterways for maritime trade. The impacts on shipping routes in the Middle East, particularly in the Strait of Hormuz, had far-reaching effects across the globe. Disruptions to these chokepoints can have significant impacts on prices and can jeopardise energy security across the world. Even where potential alternatives may exist, for example longer voyages which avoid high-risk areas, these will often come with higher costs and be the subject of contractual disputes. Most industries will therefore have some level of exposure to global supply chain disruption.
Energy is a particularly important example. Many industries are not just dependent on energy as an input cost, but on the stability of energy systems themselves — including fuel supply, LNG imports, electricity grids and the infrastructure that supports them. A disruption in one region can therefore cascade into production delays, construction slowdowns and operational shutdowns far from the original event.
Australia’s reliance on international supply chains makes this particularly relevant. Businesses should be asking not simply “Who are our key suppliers?” but “Where are our critical dependencies, including energy inputs, and what happens if they fail simultaneously?”. That analysis should feed directly into business interruption planning and insurance programmes.
The boundaries between different risks are becoming blurred
Perhaps one of the most significant developments is the increasing interaction between risks that have traditionally been considered separately.
A geopolitical event can lead to physical damage, supply-chain disruption, cyber attacks, business interruption, sanctions issues and questions around political violence or war coverage — sometimes simultaneously.
Energy infrastructure is often at the centre of this convergence. Power generation facilities, refineries, pipelines, LNG terminals and electricity grids are not only physical assets, but also strategic and highly interconnected systems. Disruption in one part of the energy ecosystem can quickly create cascading effects across multiple industries and jurisdictions.
The marine and shipping sector, which by its very nature is highly interconnected and has many touchpoints across different industries, must also be able to respond to various different issues across multiple jurisdictions. In a maritime context, geopolitical disruption and conflict can lead to physical damage, cyber threats, ports and terminal disruptions, environmental pollution, salvage and general average, delays and disputes under charterparties and bills of lading. The result is that the ensuing loss may involve multiple stakeholders including shipowners, charterers, cargo interests, freight forwarders, foreign governments, ports, financiers and insurers. For insurers and insureds, this can create complex questions around causation, policy response, exclusions, aggregation and the interaction between different insurance policies.
The lesson is clear: insurance programmes need to be stress-tested against realistic scenarios rather than assessed purely on an individual-policy basis.
Critical infrastructure requires a different approach to resilience
Australia is entering a period of significant investment in infrastructure, energy, resources and technology.
The lessons from the Middle East reinforce the importance of building resilience into these assets from the outset.
Energy infrastructure in particular — including renewables, gas, transmission networks, storage facilities and emerging hydrogen projects — is becoming increasingly central to economic stability and national resilience. These assets are also highly exposed to both physical and non-physical risks, including geopolitical disruption, supply-chain constraints and cyber threats.
Ports, airports, energy infrastructure, telecommunications, data centres and transport networks are not simply commercial assets. They are part of interconnected systems. A disruption to one can have consequences far beyond the asset itself.
The question should therefore move from “How likely is this event?” to “How significant would the consequences be if it occurred, and how quickly could we recover?”
That is a fundamentally different approach to risk.
Insurance needs to evolve with the risk landscape
The changing geopolitical environment also presents challenges for the insurance market.
Policyholders increasingly need to understand how traditional property and business interruption cover interacts with political violence, terrorism, cyber, marine, war and political risk policies. Insurers, meanwhile, need to consider how individual exposures can aggregate across a portfolio when a single geopolitical event affects multiple insureds.
Energy-related losses can be particularly complex, given the scale of values involved, the interdependency of assets and the potential for widespread systemic impact.
Marine and shipping losses will often find themselves at the intersection of war risks, hull and machinery, cargo and P&I insurance. Both insurers and insureds must understand how sanctions clauses, war exclusions, notice requirements and changes in trading limits may also affect the cover available under these policies.
Regardless of the type of business being underwritten, clear policy wording and early engagement between insurers, brokers, insureds and their advisers are therefore more important than ever.
For complex claims, the ability to establish causation, preserve evidence and understand the interaction between different policies can become critical very quickly.
Preparation is ultimately the greatest protection
Perhaps the most important lesson is that resilience is built before the event, not during it.
Businesses that have already identified their critical dependencies — including energy inputs and infrastructure reliance — established clear crisis-management protocols and understood their insurance arrangements are better positioned to respond when circumstances change rapidly.
For insurers, the same principle applies. Claims preparedness, scenario planning and early mobilisation of specialist expertise can make a material difference when multiple complex claims arise at once. This will be important not only to reviewing the claim under the policy but also to any potential recovery effort which may also be pursued.
A changing risk environment
Australia does not face exactly the same geopolitical circumstances as the Middle East, nor should it attempt to replicate the region’s approach to risk, but it can learn from the experience.
The fundamental lesson is that geopolitical, physical, cyber, supply-chain and financial risks are increasingly interconnected. Events that appear geographically remote can have consequences much closer to home — particularly through energy markets and infrastructure systems.
For Australian businesses and insurers, the challenge is therefore not simply to predict the next crisis. It is to build organisations, infrastructure and insurance programmes that are resilient enough to respond when the unexpected happens.
