Political Risk and Trade Credit

Written by Naomi Vary & Gabriel Boutier-Downey

Key developments in 2024

For the previous two years we have started our review with commentary on the war in Ukraine and, unfortunately, its continuation means we are obliged to do so again. Last year we indicated that positions were entrenched, but as we head into 2025 it appears Ukraine's prospects are becoming gloomier. Support from the United States is likely to be less forthcoming under the new presidency and if there is still territory to be gained it is likely Russia will take advantage of this. Accordingly, underwritten assets deeper into western Ukraine are increasingly becoming at risk of the types of losses seen across the market for the last couple of years.

In addition to the Russia-Ukraine war, we noted in our previous update that separate (but in some ways related) conflicts had and will continue to spike – placing pressure on War Risks books. This proved to be true across the globe, for example in relation to the Sahel and West Africa generally. What is more, we referenced the impact of war 'fatigue' in Europe and the potential ramifications of the US presidential election. The incoming Trump presidency has indicated US isolationism, and this will transfer into uncertainties on the China-Taiwan strait, as well as emboldened behaviour from North Korean military (noting involvement in the Russia-Ukraine War).

Despite the uncertainties of these military conflicts, trade credit finance has proved itself to have a relative state of resilience during 2024. The ICC has noted the low credit risk amongst trade finance agreements with defaults mainly from predictable geopolitical and economic influences. This is perhaps a reflection of the observed move towards more domestic and developed economies rather than riskier emerging markets. Although this is certainly not to say the year has been without its struggles. Company insolvencies remain a concern even as the COVID-19 pandemic slips into recent history. Insurers' clients are struggling with labour shortages, high energy costs, and even more recently an increase in taxation. These issues have and will continue to transform into insurance claims as defaults on agreements naturally follow suit.

Looking forward to 2025

The status of the international military conflicts already mentioned and the consequent claims arising from those are expected to persist; since preparation of the first draft of this chapter we have seen regime change in Syria, with likely effects to be felt over a much wider area. Furthermore, domestic political violence incidents may be of increasing concern for insurance policies placed closer to home. By way of example, there were notable political assassination attempts in the United States by citizens this year - which could be said to be driven by domestic political divisions. These divisions may be further widened by the influence of AI in algorithms which are designed to attract and thereby embolden fractious political polarities.

It is also worth noting the comments of Mi5 Director General Ken McCallum which refer to the threats being faced by European nations from multiple actors. The GRU's (Russian Military Intelligence) intention to cause mayhem on British and European streets, various Iran-backed plots, and threats from Islamic State are to name a few. The implications and format of any acts arising from such incidents is not clear, and we may see policy coverage being tested should political perils manifest themselves in unexpected ways.

Moving to trade credit insurance, we expect to see the sector grow further as the use of AI models continue to provide better strategic analysis for underwriters. The effectiveness of such technology and its ability to adapt will also be apparent over time. In a similar manner, supply chain complexities arising from sanctions and global tariffs will continue with insurers required to provide ever more adaptable products – the durability of which will be tested. All these adaptations will also be taken in the context of growing concerns about burgeoning government debts and a desire (forlorn or not) to reduce debt burdens.

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