When conflict becomes complexity: Managing geopolitical risk

Geopolitical conflict doesn't just create direct losses. It creates complexity.

The 2026 Middle East conflict, which escalated rapidly following US and Israeli strikes against Iran in February 2026, has demonstrated how quickly a regional event can generate significant global repercussions. The effective closure of the Strait of Hormuz and restrictions on regional airspace ^[1] have disrupted energy markets, shipping routes and aviation networks, with flow‑on effects across the global economy. For insurers and financial markets, the conflict has sharpened attention on war exclusions, supply‑chain fragility and inflationary pressures, illustrating how geopolitical shocks can quickly evolve into complex, systemic risks. Understanding and managing these indirect impacts is now a core capability of risk professionals.

What are the indirect risk impacts of the Middle East conflict for insurers?

The central risk management challenge lies in anticipating and responding to indirect impacts — spanning supply chains, inflation, financial market volatility, organisational operations and customer behaviour. Addressing these second‑order effects requires governance, communication and resilience frameworks that are sufficiently robust and agile to act decisively before heightened volatility translates into material financial or operational loss.

Key themes emerging from the geopolitical conflict:

Indirect impacts outweigh direct insurance losses: There is a coherent message that indirect economic and operational impacts —rather than direct insured losses — are the primary risk channel for Australian and Asia‑Pacific insurers. S&P notes that limited underwriting exposure to the Middle East means the most significant risks stem from market volatility, energy prices and trade disruption, which can affect balance sheets, earnings and capital through investment markets and inflationary pressure ^[2] . Aside from external factors, impacts to own operations such as business travels.
Supply chain disruption is flowing into claims costs and operations: The Insurance Council of Australia (ICA) highlights that rising fuel prices and disrupted supply chains are already pushing up the cost of materials, freight and labour, lengthening repair times and increasing claims severity across home and motor lines ^[3] . Even without a surge in conflict‑specific claims, these cost pressures translate directly into operational and reserving risk for insurers and affordability risk for customers.
Inflation remains a compounding risk factor: Unanimously, inflation is a key amplifier of risk. Prolonged supply chain disruption and elevated energy prices increase input costs, erode household purchasing power and place pressure on underwriting margins. S&P warns that if conditions persist, insurers may need to respond through repricing and tighter risk appetite, with potential downstream impacts on customers and market stability.
Policy wording awareness and customer expectation management are critical: NIBA emphasises that insurance coverage is not automatically invalidated by geopolitical conflict, but war and conflict exclusions are common ^[4] . This places greater importance on clear communication, claims triage and expectation management, particularly for travel, marine and trade‑exposed customers, to reduce disputes and conduct risk during volatile periods.
Human and advisory dimensions of risk are growing: NIBA frames the conflict as a real‑world test of the profession’s ability to interpret and explain fast‑moving, interconnected risks. As geopolitical, supply chain and financial risks converge, brokers and risk professionals are increasingly expected to act as trusted advisers, not just transaction facilitators, despite a recognised preparedness gap across the sector.
Governance, coordination and preparedness matter: The ICA’s escalation of oversight to its most senior industry committee underscores the importance of strong governance, data monitoring and cross‑sector coordination during systemic risk events. Treating geopolitical conflict with the same discipline as natural catastrophe risk highlights the need for structured escalation frameworks and stakeholder engagement before losses materialise.

How should risk professionals respond to high-velocity geopolitical risk?

Managing high‑velocity risk requires short‑term tactical capabilities and an effective operational response. Over the medium to long term, forward‑looking capabilities – such as scenario assessments – support governance and resilience frameworks by evaluating operational readiness and the potential financial impacts of alternative strategic responses.