Stanford Professor Scott Sagan summarised the most overlooked feature of the Geopolitical risk landscape that evades the minds of most underwriters in his succinct but apt line that ‘things that have never happened before happen all the time’. 

With increasing volumes of data and insight at our fingertips to make sense of our historical experience, it is easy to be lulled into a false sense of security when assessing geopolitical risk. This comfort and familiarity – as the saying goes – breeds contempt. Contempt disregards (and underprices) risk and many in the market find themselves worryingly exposed to ostensibly unforeseen events.

The use of the word ‘ostensibly’ is deliberate. The current conflict with Iran may be unprecedented but it did not come without clear warnings. Any regional expert you would have spoken to in the past several years would have flagged this as a possibility. They would have disagreed about the probability of such an event and the exact nature of the conflict, but all would have noted it as a foreseeable outcome. As the past month has shown us – Iran has clearly been preparing for this for a very long time.

So why did so many largely dismiss the possibility, despite clear warning signs since the October 7 attacks – including the unresolved 12-day Israel–US–Iran conflict that ended in June last year?

There are many possible answers to this. It is hard to sell a price in the region that prices-in the possibility of an event that has yet to happen, despite the clear warning signs.. Some underwriters – particularly in the PVT class – are under pressure to grow at all costs, with most delegating their control of such exposures to huge market facilities.  There is a cost to standing out – both in terms of written premium opportunities and in taking a contrarian view to market orthodoxy. No underwriter or broker wants to hear from the party pooper. It is easy to look back and conclude ‘it hasn’t happened before’ and to disregard the possibility that the world has changed. It is easy to look away and hope for the best. Cognitive dissonance is alive and well. And yet…

Zooming out from the Middle East and looking at the broader geopolitical trends at play it is clear to see tectonic shifts in the world order that have profound implications for our market. The post-World War II security order is collapsing, if it isn’t already gone. The USA – starting with Obama administration and continuing with Biden and Trump – have very deliberately stepped back from their role as the world’s policeman and guarantor of the seas. There is nobody else with the capacity or desire to fill the vacuum. The era of peace, globalisation and prosperity that went hand in hand with that is therefore on its way out. It is being replaced by a more Machiavellian approach to international relations, where ‘might is right’, hybrid conflicts proliferate and international law, norms and institutions carry even less meaning. This may seem unusual to those of us that have grown up without the shadow of conflict hanging over us, but if one even takes the most superficial look at history it is clear that we have been living through a historical anomaly. We are returning to a more natural state of global affairs, whether we like it or not. The world has changed, and yet the market hasn’t.

So how can the market do better? From a bottom-up perspective it is essential underwriters acknowledge this fact and stop assuming a peaceful rear-view-mirror is a good guide to the future. It is impossible for any Underwriter to predict the specific timing and nature of any major conflict or geopolitical issue, but it is incumbent upon them to understand the underlying political dynamics that could trigger rapid and violent change and prepare accordingly. Top-down, the likes of Lloyd’s could impose some RDS scenarios on the market that better reflect the geopolitical realities of the 2020’s and beyond. It’s likely that if Excos and Boards had sight of the regional exposures to a Middle Eastern war before it broke out they would not have drawn the same sanguine conclusions as many of their underwriting teams.

So what can we expect going forward? If history is anything to go by the lessons of this war will be forgotten all too soon, and we’ll fall back into the same pattern of hoping and pricing for the best possible outcome. Yet the warning signs are there, from the Middle East, to Europe, to eastern Asia and beyond – all brewing without the benefit of previous benign actors and systems to keep them in check.

Something like the Iran war will happen again. The market cannot say it hasn’t been warned. 

This article was published as part of London Risk Week.