Beyond the broad ‘war risk’ label
The challenge in attracting third-party capital to geopolitical and other specialty risks is not simply whether those risks can be modelled. It is whether complex exposures can be translated into clearly defined investment risks that investors can understand, price and limit.
For Yonas Osman, founder and CEO of Quantica Risk Modelling, that distinction is particularly important in areas such as marine war, where a single geopolitical event can cut across multiple classes and create concentrations that are not immediately obvious.
“Capital can accept substantial risk. It is much harder to attract when investors cannot distinguish the risk they have priced from uncertainty about what the contract actually transfers,” Osman told Bermuda:Re+ILS ahead of ILS Bermuda Convergence, held October 12-14.
Marine war demonstrates the problem. Any given conflict can affect vessels, cargo, ports, energy infrastructure and supply chains simultaneously, while assets that appear geographically dispersed might still depend on the same shipping corridor.
There is also a potential complication for investors looking to specialty risks for diversification. A significant geopolitical shock could generate insurance losses while simultaneously affecting financial markets and other assets within an investor’s broader portfolio.
“Investors should therefore test the diversification benefit rather than assume it,” Osman said.
Better modelling can help distinguish between exposures that might otherwise sit beneath the broad label of “war risk”. But Osman argues that greater analytical sophistication does not automatically translate into greater appetite or capacity.
“A risk can be quantifiable and still be unattractive because of its price, concentration, contractual uncertainty or fit with the investor’s mandate,” he said.
Indeed, improved analysis could have the opposite effect in some cases, uncovering concentrations that were previously poorly understood and leading investors to reduce rather than increase their exposure.
“Better analysis may sometimes justify less capacity, not more, by exposing concentrations that were previously underestimated,” Osman said.
For third-party capital, modelling also has to go considerably further than identifying an increased likelihood of geopolitical instability. Osman draws a distinction between forecasting escalation and estimating the potential loss to a particular portfolio or investment layer.
“A regional risk score does not, by itself, establish expected loss, the probability of exhausting a layer or how much capital could remain tied up after an event,” he said.
For marine exposures, that means connecting changes in the threat environment to the assets actually exposed, including their location, time spent in an affected area, vulnerability and insured value, before applying the relevant financial terms.
As AI and other newer technologies are increasingly used to identify emerging changes in risk, Osman believes investors should also be demanding evidence appropriate to the decisions those models are being used to support.
He argues that investors should look for time-stamped forecasts, clearly defined information cut-offs and model versions, alongside out-of-sample testing, comparisons with benchmarks and disclosure of misses and false alarms as well as successful predictions.
“One successful crisis forecast cannot establish the reliability of a remote tail-loss estimate. A model might be useful for early warning before it has sufficient evidence to serve as the principal basis for capital allocation,” he said.
That distinction could become increasingly important as modelling opens up previously difficult specialty exposures to closer scrutiny. Better technology might allow investors to identify narrower and more manageable components of geopolitical risk, but modelling alone cannot make those exposures investable.
Contract certainty remains central, including clear event definitions, coverage boundaries, aggregation rules and the treatment of sanctions, claims and collateral release.
The opportunity, therefore, is less about persuading ILS investors that geopolitical risk has become predictable and more about defining which portions of that risk can credibly be transferred.
“The opportunity is not to make geopolitical risk look safe. It is to make clearly defined parts of it transparent enough to price, limit and transfer,” Osman said.
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