Geopolitical Conflict Could Cost Global Economy $14.5 Trillion Over 5 Years: Lloyd’s

The global economy could be exposed to losses of US$14.5 trillion over a five-year period from the threat of a hypothetical geopolitical conflict causing widespread disruption to global trade patterns and supply chains, according to a report published by Lloyd’s, the insurance and reinsurance marketplace.

With more than 80% of the world’s imports and exports – around 11 billion tons of goods – at sea at any given time, the closure of major trade routes due to a geopolitical conflict is one of the greatest threats to the resources needed for a resilient economy, said Lloyd’s in its Geopolitical Conflict scenario – the fifth installment in its systemic risk series. It noted that “Understanding the vulnerability of shipping routes is critical to protecting economies in the event of disruption.”

The economic impacts of the geopolitical conflict scenario stem primarily from severe damage to infrastructure in the conflict region and the need for realignment of global trade networks due to the enforcement of sanctions and the effects of compromised shipping lines, Lloyd’s said.

The impact on businesses would depend on the region where they are located and factors such as involvement in the conflict, as well as reliance on international trade and the goods that would be delayed or lost due to the supply chain disruptions, the report stated. “Europe for example, which is heavily reliant upon other industrially advanced states for supplies like semiconductors for car and electronics manufacturing, could stand to lose up to US$3.4 trillion,” Lloyd’s said.

“One thing is clear, when a crucial supply chain pinch point is blocked, the effects are felt immediately, and ramifications can be long-lasting,” said Lloyd’s, pointing to the incident in 2021 when the Ever Given container ship ran aground in the Suez Canal, blocking international trade for six days.

“This single event halted the flow of over 12% of the world’s trade flows through the region. Shockwaves were felt long after the ship had been refloated and continued its journey. Lloyd’s List estimated that Ever Given held up $9.6 billion in trade for every day the canal was blocked and caused an estimated 60-day shipping delay,” the report noted.

Lloyd’s said the sectors most at risk from geopolitical conflicts are:

• Manufacturing. With a shortage of raw materials, producer countries may not receive payment for goods and importing countries will not be able to use the materials to create new products.
• Semiconductors. No single country has end-to-end dominance over the production and supply segments that result in finished semiconductor chips. Interruptions to the semiconductor supply chain can cause supply shortages and price inflation of the end product.
• Healthcare. Supply chain interruptions could hinder access to critical medical equipment reliant on global supply chains. Increased costs and reduced confidence could stall investment in large projects and new equipment.
• Transportation. Conflicts can impact the movement of goods as ships and airfreight are prevented from travelling through the conflict zone. No-fly zones and sanctions may prevent the movement of goods and people, and cause transport companies to lose revenue or close.

Lloyd’s said risk owners can take steps to insulate their organizations from the impacts of geopolitical conflicts, including:

• Data collection: Understanding the flow of goods in individual supply chains, how customers react, and how third parties affect an organization’s supply chain is a good way to understand where potential weaknesses and/or opportunities lie.
• Contingency planning: Broadening the range of suppliers, finding alternative locations for manufacturing and operations, and developing a system of redundancy can help maintain business continuity. “Building strategic stockpiles where reasonable may also help mitigate the fallout from a breakdown in the ‘just in time’ supply chain.”
• Act responsibly: Global companies with teams in local hubs are responsible for supporting their staff, and to an extent the wider community, said Lloyd’s, noting that protocols should be in place to evacuate or cease operations in the event of geopolitical conflict.
• Digital network resilience: A regular regiment of offline or external backup processes can keep most information secure and up to date. “Similarly, contingency and business recovery plans allow companies to find ways to carry out their operations while still offline, for example through another network server.”

Insurance as Safety Net

Insurance can be a safety net amid the chaos and uncertainty of geopolitical conflicts, Lloyd’s affirmed.

The value of insurance extends “to the compounding secondary impacts of geopolitical conflict, including downstream delays and interruptions by impacted trading partners and suppliers,” Rebekah Clement, Lloyd’s corporate affairs director, said in a statement. “Examples of insurance covers which can help businesses protect themselves against these impacts include political risk insurance and contingent business interruption, as well as dedicated war risk insurance.”

Lloyd’s acknowledged that war has long been viewed as a nearly uninsurable risk. “The war exclusion is almost as old as the insurance industry itself. Companies and individuals faced with a known risk may be able to purchase a separate war risk insurance policy however, and as demonstrated in response to the Ukraine war, specific coverages can be arranged through cross-sector collaboration to support the safe passage of vital exports and relief efforts.”

The report discussed some of the coverages available for geopolitical risk exposures:

• Political risk insurance. Assets and funds located in politically volatile regions can be vulnerable in the event of unrest. Political risk insurance provides protection against losses from government actions like expropriation, currency inconvertibility, confiscation, contract breaches, and political violence.
• Credit insurance. Political unrest brings frozen funds, asset seizures and shipment delays, which may result in non-payment or non-fulfilment of contracts by trading partners or suppliers. Credit insurance supports more than $3 trillion of global trade from losses due to non-payment of commercial debt, which help businesses protect their capital and cash flow.
• Contingent business interruption (CBI) insurance. As businesses rely on other companies for raw materials, components, or products, geopolitical conflicts create “a knock-on effect down the supply chain, especially if alternative suppliers are unavailable.” “CBI insurance protects businesses from costs associated with declining turnover, loss of profit, and accrued charges caused by disruptions from third-party suppliers or customers, which impact the business’s ability to produce products or deliver services as usual,” Lloyd’s said.
• War-on-land insurance. Assets located within conflict zones and overland transportation routes are vulnerable during geopolitical conflict, but there are solutions available, Lloyd’s indicated. “In May 2024, Willis Towers Watson partnered with Ukrainian insurer, VUSO, to launch the first London-backed facility offering war-on-land insurance, providing critical coverage and certainty for businesses transporting goods overland in Ukraine.” Lloyd’s said such coverage helps “to alleviate supply chain and trade stressors as goods are protected during the journey to their intended destination.”

The geopolitical conflict scenario was produced in partnership with the Cambridge Centre for Risk Studies. Other scenarios in the series have covered extreme weather events leading to food and water shock (July 2023), cyber attack (October 2023), global economic stagnation (January 2024), and volcanic eruption (May 2024).