Part II: War, Insurance, and the Global Economy

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⚙️ How Conflict Reshapes the Entire Insurance Ecosystem

In Part 1 (click here to view), we looked at how a geopolitical flashpoint like the Strait of Hormuz can suddenly make insurance the critical mechanism that keeps global trade moving. But the reality is much broader.

When war begins, it doesn’t just threaten borders or supply chains. It reconfigures the entire insurance ecosystem — from energy infrastructure and airlines to homes, supply chains, capital markets, and even environmental risk.

Insurance is not just a financial product during conflict. It becomes economic infrastructure. In many cases, whether businesses operate, planes fly, ships move, projects continue, or families recover after loss comes down to one question: is there insurance backing the risk?

⚠️ Why War Creates Unique Insurance Challenges

One of the most important facts about insurance during wartime is something many people don’t realize: most insurance policies exclude war. Standard personal and commercial policies often exclude damage caused by war or “warlike actions,” which historically has been considered an extremely large and unpredictable risk for insurers.

This is why specialized markets and policies exist for conflict-related risks, including:

  • War risk insurance
  • Political risk insurance
  • Trade credit insurance
  • Marine and aviation war coverage
  • Contingent business interruption coverage

These instruments help stabilize economies when geopolitical risks escalate. Without them, large parts of the global economy would simply stop functioning.

🌍 The Insurance Markets That Matter Most During War

1. Energy Infrastructure Insurance

Energy systems become immediate targets or strategic leverage during conflict. This includes:

  • Oil refineries
  • LNG terminals
  • Pipelines
  • Power plants
  • Transmission infrastructure

Recent conflicts have shown how quickly attacks on energy infrastructure can disrupt global markets, increase oil prices, and force countries to redesign supply routes and logistics. Insurance plays several roles here:

  • Covering damage to physical assets
  • Financing reconstruction
  • Supporting investment despite geopolitical risk
  • Protecting lenders and investors

Political risk insurance is particularly important because it protects companies from government actions, asset seizures, contract violations, or political violence. Without these protections, many global energy projects would simply never be financed.

2. Aviation and Airline War Risk Insurance

Airlines operate in one of the most sensitive risk environments during war. Conflict can lead to:

  • Airspace closures
  • Missile threats
  • Aircraft seizures
  • Route cancellations
  • Passenger liability risks

Aviation policies typically require separate war risk coverage for events tied to armed conflict. History shows how quickly aviation risk can change. Entire regions can suddenly become no-fly zones, and airlines may require government-backed insurance programs to continue operating during conflict. Without insurance, planes simply do not fly.

3. Shipping and Global Trade Insurance

Shipping is often the first sector to feel the effects of war. Around 80% of global trade moves by sea, meaning maritime insurance is critical to the functioning of the global economy.

When war risk rises:

  • Shipping routes become classified as high-risk zones
  • War risk premiums surge
  • Some insurers withdraw coverage
  • Governments sometimes step in to backstop the market

In recent conflicts, maritime war-risk premiums have jumped dramatically, sometimes rising many times higher than normal levels. And if ships cannot obtain insurance, they usually cannot enter ports, secure financing, or carry cargo. Insurance effectively determines whether global trade flows continue.

4. Supply Chain and Business Interruption Insurance

War rarely affects only the battlefield. Modern economies rely on deeply interconnected supply chains, and conflict can break these networks quickly.

Examples include:

  • Factories losing critical components
  • Ports closing
  • Trade sanctions
  • Frozen payments
  • Supplier shutdowns

This is where contingent business interruption insurance becomes important — covering losses when suppliers or partners cannot deliver due to geopolitical disruption. In large conflicts, these indirect losses often exceed direct physical damage.

5. Homes, Families, and Personal Insurance Reality

This is one of the most difficult truths about wartime insurance. Most personal policies including the following do not cover war-related damage.:

  • Homeowners insurance
  • Auto insurance
  • Property insurance

This is why in major wars: governments often become the insurer of last resort. Examples historically include:

  • State-backed insurance pools
  • Reconstruction programs
  • Disaster compensation systems
  • War damage funds

Workers’ compensation is often one of the few insurance lines that still pays benefits related to war-related injuries in certain contexts. In practice, recovery after war is usually a combination of:

  • Government support
  • International aid
  • Reconstruction financing
  • Insurance where available

6. Environmental and Industrial Risk

War can create enormous environmental liabilities. These may include:

  • Oil spills
  • Chemical facility damage
  • Pipeline ruptures
  • Power grid failures
  • Fires and contamination

These risks create complex insurance questions:

  • Who is liable?
  • Are damages insurable?
  • Is it war exclusion or environmental liability?
  • Who pays for cleanup?

Environmental insurance and government-backed compensation frameworks often become critical after major conflicts. In many cases, the insurance and reinsurance industry helps fund large-scale environmental recovery efforts.

🤝 Why Governments and Insurers Work Together During War

Conflict often pushes risks beyond what private insurers can manage alone. This is why public-private insurance partnerships exist.

For example, terrorism insurance systems and reinsurance pools have been created to stabilize markets after major attacks and ensure coverage remains available. These partnerships:

  • Prevent insurance market collapse
  • Maintain investor confidence
  • Keep trade and infrastructure operating
  • Support economic recovery

In extreme scenarios, geopolitical conflict could expose the global economy to trillions of dollars in losses over several years. Insurance helps absorb and distribute that risk.

📊 War Changes the Economics of Insurance Itself

Conflicts don’t just affect policyholders. They reshape the insurance industry too. Some of the major effects include:

Premium Volatility

War risk pricing can rise extremely quickly when conflict expands.

New Exclusions and Coverage Redesign

Insurers often rewrite policy language after major geopolitical events.

Increased Reliance on Reinsurance

Global risk-sharing becomes more important.

Government Intervention

States sometimes guarantee or backstop coverage markets.

Capital Markets Involvement

Insurance-linked securities and reinsurance capital help absorb large shocks.

Interestingly, research has found that war can reduce overall insurance activity. But it also pushes insurers to adjust pricing strategies and risk management to remain financially stable.

🔑 A Key Reality: Insurance Often Determines Whether Economies Keep Moving

There’s a simple but powerful truth about war and insurance: if a risk cannot be insured, taking that risk often cannot happen economically.

Ships don’t sail.
Aircraft don’t fly.
Energy projects stop.
Financing disappears.
Trade slows.

That’s why during major conflicts, governments, insurers, and global markets often move quickly to rebuild insurance capacity — sometimes within days. Insurance becomes a stabilizing force in unstable times.

🌐 The Big Picture: Insurance Is Part of National and Global Security

Insurance is often viewed as a financial service. But during wartime, it functions more like critical economic infrastructure. It supports:

  • Trade
  • Energy supply
  • Aviation
  • Reconstruction
  • Supply chains
  • Investment
  • Families and businesses recovering after loss

In many ways, insurance helps determine how resilient an economy is during geopolitical shocks. And as global tensions increase in multiple regions, the relationship between war, risk, and insurance markets is becoming one of the most important (and least understood) dynamics in the global economy.

Insurance, War, and the Strait of Hormuz: Why Global Trade Suddenly Depends on a “Piece of Paper”

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The Strait of Hormuz has always been one of the most strategically important waterways in the world. But in recent days, something unusual happened: global shipping did not stop because the waterway was physically closed — it stopped because the insurance disappeared.

This rare moment highlights a powerful but often invisible reality of the modern global economy: insurance is one of the critical systems that makes global trade possible.

For readers following the recent escalation between the United States and Iran, the insurance implications have become a major part of the story. This article explains what is happening, why insurance markets suddenly pulled back, and why the U.S. government has stepped in with a historic insurance backstop to keep global energy moving.

🌍 Why the Strait of Hormuz Matters So Much

The Strait of Hormuz is a narrow waterway between Iran and Oman connecting the Persian Gulf to the Arabian Sea. Despite its small size, it is one of the most important trade chokepoints in the world. Roughly 20% of global oil and large volumes of liquefied natural gas (LNG) move through the strait every day.

Energy exports from major producers all depend heavily on this route from countries such as:

  • Saudi Arabia
  • Qatar
  • United Arab Emirates
  • Kuwait
  • Iraq

When shipping through Hormuz is disrupted, the effects ripple through energy markets, shipping costs, and global inflation.

⚠️ What Triggered the Current Crisis

The current situation began after U.S. and Israeli military strikes on Iran, followed by Iranian retaliation in the Gulf region. Missile attacks, drone threats, and damage to tankers dramatically increased the perceived risk to commercial shipping.

Within days:

  • Multiple tankers were struck or damaged
  • Shipping companies paused transits
  • Maritime traffic dropped sharply
  • Oil prices surged

Some analysts say traffic through the strait fell by as much as 80% once insurance cover disappeared. But the key point is this: shipping did not halt primarily because ships could not sail. It halted because ships could not get insured.

🚢 The Invisible Backbone of Global Shipping: Marine Insurance

Modern shipping relies on a complex web of insurance coverage. Before a vessel can sail through high-risk waters, several parties require insurance documentation:

  • Shipowners
  • Cargo owners
  • Banks issuing letters of credit
  • Port authorities
  • Crews and operators

Without insurance coverage:

  • Banks may refuse financing
  • Ports may deny entry
  • Ship crews may refuse to sail
  • Cargo owners will not load goods

Industry experts often call marine insurance the “permission slip” of global trade. If the insurance disappears, the trade stops.

📉 Why Insurers Suddenly Dropped War-Risk Coverage

As the conflict escalated, many marine insurers and protection-and-indemnity (P&I) clubs withdrew war risk insurance coverage for vessels entering the Persian Gulf. War risk coverage protects against losses caused by:

  • Military attacks
  • Missiles or drones
  • Terrorism
  • Piracy
  • Confiscation or seizure

Several major insurers, including leading maritime mutual insurers and P&I clubs, pulled coverage for ships operating in the region. Premiums also spiked dramatically, in some cases rising multiple times over within days. From the insurer’s perspective, the situation looked like this:

  • Missiles targeting tankers
  • Active military conflict in shipping lanes
  • Potential closure of a strategic chokepoint

In that environment, risk becomes extremely difficult to price. The result was an insurance vacuum.

🏛️ The U.S. Government Steps In With a $20 Billion Insurance Backstop

To stabilize shipping and global energy markets, the United States government took an unusual step. President Donald Trump directed the U.S. International Development Finance Corporation (DFC) to provide political risk insurance and financial guarantees for maritime trade moving through the Gulf. The program includes:

  • Up to $20 billion in reinsurance capacity
  • Coverage for hull, machinery, and cargo losses
  • Partnerships with U.S. private insurers
  • Coordination with the U.S. Treasury and military command

The goal is straightforward: restore confidence so ships will sail again. In addition to the insurance guarantees, the U.S. government has also indicated that naval escorts could accompany tankers if necessary to secure the waterway. This combination of military security and government-backed insurance is designed to stabilize one of the most critical arteries of the global economy.

📊 Why This Move Is So Significant for the Insurance Industry

This development is unusual because governments rarely step directly into global insurance markets. But in extreme geopolitical situations, they sometimes do. Examples include:

  • U.S. terrorism insurance after 9/11 (TRIA)
  • Government-backed insurance during major wars
  • Pandemic-related risk backstops

In the Hormuz case, the government is effectively acting as a reinsurer of last resort to ensure commercial insurers can participate again. Without that backstop, shipping companies might simply refuse to transit the strait.

🌐 The Ripple Effects Across Global Insurance Markets

The Hormuz crisis highlights how geopolitical conflict affects many insurance sectors beyond marine shipping as described above. Some of the most exposed additional areas include:

Energy Infrastructure

Oil platforms, refineries, pipelines, and LNG terminals across the Middle East face increased political violence and sabotage risks.

Aviation Insurance

Airlines flying through conflict zones carry specialized aviation war risk coverage, which insurers can cancel or reprice during major conflicts.

Supply Chain Insurance

Cargo delays, rerouted shipping, and port disruptions create claims under trade disruption and logistics policies.

Cyber Warfare

Modern conflicts often include cyberattacks targeting:

  • Energy Infrastructure
  • Shipping Systems
  • Financial Networks

These can trigger disputes over cyber war exclusions in insurance policies.

Data Centers and Digital Infrastructure

Cloud infrastructure and data centers supporting global logistics, financial markets, and energy trading systems could become strategic cyber targets, raising questions around cyber war coverage and systemic risk.

🧭 A Bigger Lesson: Insurance Is a Pillar of Global Stability

The situation in the Strait of Hormuz is a powerful reminder that insurance is not just a financial product — it is part of the infrastructure of the global economy. When insurers withdraw coverage, it can:

  • Freeze trade
  • Disrupt energy markets
  • Trigger price spikes
  • Reshape geopolitical strategy

In this case, the insurance system effectively became the bottleneck of global oil flows. And the response — government-backed political risk insurance — shows how central risk management is to modern geopolitics.

📝 Final Thoughts

For most people, insurance is something purchased quietly in the background — auto insurance, home insurance, health insurance. But in moments like this, insurance becomes visible as a strategic tool that can influence global markets and even geopolitical outcomes. The Strait of Hormuz crisis demonstrates that:

  • Wars disrupt risk markets first
  • Insurance determines whether commerce continues
  • Governments sometimes step in when private markets cannot absorb the risk

In short: sometimes the most important asset in global trade is not a tanker, a pipeline, or a port. It is an insurance policy.