The Far Reaching Insurance Impacts of the Middle East Conflict

A deep dive into the insurance impacts, including the number one driver of costs, the drivers for motor and home insurances, and how some of the largest Australian insurers are responding.

It’s 2026. You wake up on a Monday morning, open your phone, and every second post on Instagram is about last week's alien invasion. You scroll for a minute, put your phone down, and get on with your day.

Why wouldn't you? Over the past two decades, you've lived through wars, a global pandemic, a financial crisis, major supply chain disruptions…a seemingly endless stream of "once-in-a-generation" events. Aliens were a bit of a shock at first, but just like the rest, you never thought it would happen in your lifetime, so you got used to it quicker than you would’ve thought. These types of “new” events barely register anymore.

Whether or not that future ever actually arrives, it captures a reality many of us already feel: the world is becoming harder to predict. Events once considered 1-in-100-year occurrences seem to happen every decade, while 1-in-10-year events appear every few years.

For actuaries, that raises an uncomfortable question: as uncertainty increases and historical data becomes a less reliable guide to the future, where do we draw the line between data-driven analysis and professional judgement?

Naturally, the impacts on insurers won’t be consistent, and will vary by lines of business. But this article explores one example of the challenge that Home and Motor insurers may face as they navigate reserving, pricing and FY27 planning.

Why does conflict in the Middle East impact Australia?

In a word: oil.

There are many other reasons, but for the purpose of this article, oil is the focus. Some facts on oil:

• Global oil demand is around 100 million barrels per day [i] .
• Australia uses about 1.1 million barrels per day and has reserves of 1.8 billion barrels [ii] . Australia’s reserves are equivalent to 4.5 times its annual consumption.
• Around half of global oil demand is attributable to road transport, which remains a key input into the cost of goods and services ^[iii] .
• Oil is also a key input in the production of plastics, synthetic rubber, solvents, asphalt and many everyday products, meaning the supply chain impacts and inflationary impacts are not limited to just the petrol bowser ^[iv] .

Over the last three months, the impact of the Iran conflict on the Australian and global economy has been less severe than initial analyst predictions, with the price of crude oil generally staying below $100 USD a barrel compared to potentially $200 USD a barrel in scenarios over this period published when the conflict first started ^[v] . However, as the conflict continues to escalate, the duration and severity of the Iran conflict remain key areas of uncertainty.

As a result, we rely more on lessons from previous events for guidance on what we may see over the next six-twelve months:

• While it has generally been assumed that this would be a shorter conflict, the timing of this conflict continues to be a key area of uncertainty. The Iraq war lasted eight years. So halting the Strait of Hormuz and 20% of global oil supply ^[vi] caused justified concern, particularly for countries with weaker oil reserves.
• Previous geopolitical events influenced insurance not only by increasing costs but also by changing the behaviour of consumers. During the 1973 oil crisis, consumer preferences shifted to smaller, more efficient cars ^[vii] . Today, there is evidence of households bringing forward the purchase of electric vehicles, which has also been influenced by fringe benefit tax incentives.
• Affordability pressures push the rest of society to also adapt. Businesses may alter supply chains or delay capital investment, and governments may introduce temporary measures to ease cost-of-living pressures or encourage changes in transport use.

It’s important to remember that these drivers of risk rarely occur in isolation and can reinforce one another. For example, an oil shock drives financial market uncertainty, which contributes to exchange rate volatility, which drives higher costs for parts and replacement materials, which drives inflation, which creates even more financial market uncertainty.

These behavioural responses can alter the underlying exposure to risk, affecting claim frequency independently of claim severity. For actuaries, understanding these second-order effects is just as important as measuring inflation, as they can materially influence pricing assumptions, reserving estimates and portfolio performance.

How does the Middle East conflict affect motor insurance claims?

Before diving into the impacts on Motor insurance, let’s look at the impact of recent events and, as good actuaries do, use this to suggest what happens next.

Motor insurance is often one of the first classes to experience the effects of geopolitical conflict because fuel prices respond quickly to disruptions in global oil supply, with impacts to both claims size and claims frequency.

Claims frequency impacts – driven by fuel prices and driving behaviour

When petrol and diesel prices rise sharply, households typically respond by reducing discretionary travel, consolidating trips, carpooling, or switching to public transport where practical. Fewer vehicle kilometres travelled generally reduce exposure to accidents, potentially lowering claim frequency.

However, the impact is unlikely to be uniform across Australia. Metropolitan areas with well-developed public transport networks may experience a more pronounced reduction in traffic volumes than regional or rural areas where private vehicles remain essential.

Government policy can further influence these behavioural changes. During the 2026 fuel price shock, Victoria introduced a temporary period of free public transport (March-May 2026), followed by half price fares till year end, with the explicit objective of reducing fuel demand, encouraging a shift from private vehicles and easing congestion ^[viii] . Other states chose different approaches, meaning insurers may observe different changes in claim frequency across different jurisdictions.

Average claim size impacts – driven by inflation in parts, repairs and replacement

As seen during the COVID-19 pandemic, global supply chain disruptions can significantly increase average repair costs. Similar dynamics can emerge following geopolitical events that affect shipping or manufacturing.

Following the closure of local vehicle production (Ford, Holden and Toyota between 2016 and 2017), Australia has very limited domestic automotive component manufacturing ^[ix] . The by-product of this is that Australia imports a large proportion of vehicle parts. Whenever something has to travel, you can expect costs to increase, and that increase scales with oil shocks. This may appear as disrupted shipping routes, increasing freight costs of replacement parts. The end result is more costly and slower repairs, and likely greater costs in labour and hire cars.

Taking this a step further – as costs increase, the question of whether a car is a total loss or not is re-evaluated. Higher prices for steel, aluminium, energy and transport can lead to total loss settlements, higher new vehicle prices, and higher second-hand vehicle values.

Supply chain disruptions may also drive changes in insurer claims handling practices, including a preference for cash settlements or a preference for writing off cars if supply chain disruptions lead to unacceptable repair times. 

Given this, the average claim size is likely to increase. But is it really that simple?

What about the types of accidents that are occurring while road traffic is reduced? Do we observe a drop in severity, applying downward pressure on the average claim size before the flow on of supply chain impacts are realised? What about multiple party vs single party accidents, or the mix of at-fault and not-at-fault claims? Monitoring these claim impacts may be difficult, as Motor insurers likely observe multiple forces acting at the same time, such as:

• Potential decrease in claim numbers
• Potential increase in claims cost
• Fewer kilometres travelled
• Higher repair costs
• Reduced traffic congestion
• Longer repair times
• Increased use of public transport
• Increased hire car costs
• Shift in claims mix
• More expensive replacement parts

Whether portfolio profitability ultimately improves or deteriorates depends on which effect dominates and the speed and clarity in how insurers respond.

What does the Middle East conflict mean for home insurance and reinsurance?

Home insurance has less behavioural impact from overseas conflict. While driving less may mean more time indoors at home, which could provide benefits from a claims perspective, extending beyond this becomes guesswork at best. That said, Motor impacts such as rising costs of parts and labour shortages may also be seen in the Home space.

But we don’t operate in a vacuum, so pressures from overseas conflicts can worsen already deteriorating positions. For example, underinsurance issues can grow off the back of climate change or peril pricing in a market continuously looking to reduce cross-subsidisation.

Home is unlikely to benefit from any frequency reduction. However, additional time at home can lead to a myriad of impacts from greater accidental damage volumes, less theft activity, or lower water claims cost (from policyholders being able to respond quicker to an incident).

What we can expect is rebuilding homes or parts of homes to become more expensive as construction materials (such as timber, steel and copper) increase in cost, their transport increases in cost, and delays become more likely for imports, which leads to slower repair times and higher costs.

The “why” here stems back to these commodities being globally traded and sensitive to geopolitical events, and as repair periods extend, additional costs incurred from temporary accommodation or claims handling accumulate.

Sum insured impacts – driven by affordability pressures and access to commodities

We’re currently in a climate where continuous pressure has increased sum insured challenges. Cost of living pressures encourage homeowners and landlords to manage premiums through whatever means they can. Continuous inflation in Home insurance has meant many sum insureds have failed to keep pace.

The frequency of peril events, which drives a significant portion of Home insurance premiums, has added further strain to sum insureds. Compounding this is the additional dimension of increased prices for (or inaccessibility to) commodities and further inflation, which increases the pressure. The risk grows beyond individual insurers and becomes a greater social concern.

While insurers apply automatic indexation, severe inflation can outpace annual adjustments.

Reinsurance impacts – driven by global market stress and volatility

This sum insured problem flows into the reinsurance market where exposure is everything.

Perhaps the largest indirect impact of the Middle East conflict on Australian insurers occurs through the global reinsurance market.

Large geopolitical events can affect reinsurers through:

• investment volatility
• capital market stress
• reduced risk appetite

which may result in:

• higher reinsurance pricing
• increased attachment points
• reduced capacity
• stricter underwriting terms

Insurers should also question whether their reinsurance program is adequate during times of economic uncertainty. While post loss amplification assumptions used in catastrophe modelling may be appropriate in normal economic conditions, the impact of a large Sydney hailstorm or Earthquake will be significantly greater in an economy facing increased production and transportation costs and supply chain disruptions.

Pricing implications

Insurers should draw on insights from previous geopolitical and economic disruption while carefully assessing the reliability of technical pricing models during periods of heightened uncertainty. Given the potential for rapid changes in claims experience, a cautious pricing approach may be appropriate to help protect underwriting margins, supported by close monitoring and timely recalibration as new data emerges.

At the same time, insurers that can respond quickly to changing conditions may be well positioned to benefit if the anticipated increase in claim costs proves less severe than initially expected. When geopolitical events cause longer term trends and normal assumptions to be less reliable, agility in pricing and portfolio management is a competitive advantage.

Rather than relying predominantly on historical claims experience, actuaries may increasingly need to incorporate external economic and behavioural indicators – such as fuel prices, interest rates, mobility trends and traffic volumes – into pricing models. Emerging data sources, including telematics, will also become increasingly valuable in understanding changes in driving behaviour. However, care should be taken to avoid overstating short-term reductions in claim frequency that may not persist over the longer term.

Additional reserving implications

The various impacts arising from geopolitical disruption are unlikely to occur in isolation and may reinforce one another, amplifying their effect on claims costs and reserving assumptions.

Reserving actuaries should test a range of scenarios that reflect the potential for higher inflation in outstanding claims reserves, particularly where repair costs, parts availability, labour costs and other inflationary pressures persist longer than expected. Judgement will also be required to determine whether larger “shocks” seen at the start of the year will continue to be reflective of future claims experience.

If fuel prices remain elevated for an extended period, historical claim frequency patterns may become less predictive of future experience. Reserving analyses should therefore distinguish between changes driven by reporting delays and those reflecting genuine shifts in underlying exposure and driving behaviour. At the same time, inflation assumptions for outstanding claims may require more frequent review and adjustment than traditional reserving cycles would typically allow.

It is therefore important to consider potential impacts of the Iran conflict:

• When setting central estimates – either through explicit IBNR assumptions, when setting economic inflation assumptions, or when considering whether a superimposed inflation assumption is warranted.
• When setting risk margin assumptions – which may require a review of systemic scorecard loadings.
• When performing capital monitoring and reinsurance placement.
• When communicating uncertainties to readers or in actuarial reports.

So where to from here?

Other insurance classes could be explored, but for the sake of readers who've made it this far, we'll leave those for another day.

If there are three takeaways from the discussion, they are these:

1. Geopolitical events rarely affect insurers directly. They influence the economic and behavioural drivers that ultimately shape claims experience. Fuel prices, inflation, supply chains, consumer behaviour and government policy can all interact in ways that are difficult to disentangle.
2. Historical data remains essential, but it is no longer sufficient on its own. Periods of heightened uncertainty require actuaries to supplement traditional analysis with judgement, scenario testing and external indicators that may provide earlier signals of emerging trends.
3. Agility is becoming a competitive advantage. Insurers that monitor experience closely, identify changes quickly and adapt pricing, reserving and underwriting decisions in a timely manner will be better positioned than those waiting for annual experience studies to confirm what has already changed.

The Middle East conflict may ultimately have only a modest impact on Australian general insurance, or it may become another event that reshapes inflation, supply chains and consumer behaviour for years to come. The point is not to predict which outcome will occur, but to recognise that today's actuarial decisions increasingly need to account for a wider range of plausible futures than history alone might suggest. To date, we have seen insurers respond in various ways:

• Swiss Re announced in May 2026 a US$400M provision (globally) for potential inflationary impacts of the ongoing conflict in the Middle East ^[x] .
• Suncorp has included references to “increase in risk margins associated with ongoing geopolitical risk” in their FY26 annual report, which states that the insurer is well positioned “despite ongoing geopolitical uncertainty and elevated inflationary pressures”, and links resilience to broad and deep supply chains, reinsurance arrangements and low-risk investment portfolios expected to benefit from higher yields and provide an organic hedge to inflation ^[xi] .
• IAG has not made a direct reference to the Iran conflict in the FY26 results but has noted forward-looking statements are subject to assumptions and risks beyond IAG’s control, including adverse natural peril events, uncertainties in the Australian and global economic environment, changes in the regulatory environment, and the evolving technological landscape ^[xii] .

Perhaps that brings us back to the alien invasion. If extraordinary events continue to become ordinary, the challenge for actuaries is not to predict the next crisis – it is to build pricing, reserving and capital frameworks that remain robust, regardless of which crisis arrives next. In an increasingly uncertain world, professional judgement is not replacing data; it is becoming an increasingly important complement to it.

References

^[i] https://www.iea.org/reports/oil-market-report-june-2026

^[ii] https://www.worldometers.info/oil/australia-oil/

^[iii] https://www.iea.org/reports/sheltering-from-oil-shocks/road-transport-fuels

^[iv] https://www.iea.org/reports/the-future-of-petrochemicals

^[v] https://www.energyconnects.com/news/oil/2026/june/why-oil-s-not-at-200-after-the-biggest-supply-shock-in-history/

^[vi] https://www.eia.gov/todayinenergy/detail.php?id=65504

^[vii] https://enginestories.com/history/the-impact-of-the-oil-crisis-on-the-auto-industry/

^[viii] https://www.abc.net.au/news/2026-04-19/free-public-transport-victoria-extended-fares-halved/106580938

^[ix] https://www.industry.gov.au/publications/australian-automotive-industry-report

^[x] Swiss Re strengthens reserves by $400m for inflationary impacts of Middle East war - Reinsurance News

^[xi] https://announcements.asx.com.au/asxpdf/20260812/pdf/072nfyxhy8c8lw.pdf

^[xii] https://www.iag.com.au/content/dam/corporate-iag/iag-aus/au/en/documents/report-and-results/iagl-appendix-4e-fy26-annual-report.pdf