The ongoing conflict between Iran and Israel poses a long list of challenges to the global insurance industry, including rising risk exposure across various insurance lines and growing threats to investment portfolios, Morningstar DBRS says.
In a new report, the rating agency examines the implications for the industry from the hostilities, which represent “a complex set of financial, operational and strategic risks” for insurers, as the episode impacts almost every insurance business line and asset class.
“As the conflict unfolds, insurers will be tested on their underwriting volatility, capital resilience and ability to adapt to a fast-moving risk landscape,” the report said.
At the same time, increased volatility in insurers’ investment portfolios could “threaten capital buffers and solvency margins,” DBRS said.
The conflict’s effects extend well beyond the combat zone, “affecting marine shipping lanes, aviation corridors, cyber networks, global capital markets and supply chains,” it said.
The direct impact on insurance operations — with rising exposure to war, cyber, travel and political risk — poses “meaningful capital pressure” for many insurers, the report said.
“Although war-risk policies often contain exclusionary clauses that limit coverage in active conflict zones, the nature of modern missile and drone technology makes it difficult to fully anticipate or contain losses,” the report said. “A stray missile or miscalculated air defence response could result in the loss of commercial aircraft, triggering significant insurance claims.”
Additionally, aviation infrastructure in the region — including airports and maintenance facilities — faces increased risk.
The cyber sector may see the most significant impact from an insurance perspective, the report said.
Both sides have reportedly engaged in extensive cyberattacks targeting infrastructure and Iran’s payment system.
“Unlike conventional military activity, cyber warfare crosses borders instantaneously and can affect insureds far from the physical conflict zone,” the report noted, adding that insurance companies themselves are also potential targets.
“For cyber insurers, the growing scale and sophistication of state-sponsored cyberattacks have been raising questions about risk modelling, underwriting and capital adequacy,” it said.
While these policies typically contain “war exclusions,” the report noted that disputes over the source of attacks are increasingly common. “Courts may be reluctant to accept narrow interpretations of war exclusions in the face of ambiguous cyberattack attribution,” it said.
“The loss of confidence in cyber risk models, particularly for accumulation events driven by systemic attacks, poses a potential capital risk for insurers heavily exposed to the cyber market,” the report said.
There are also a range of knock-on effects for insurers stemming from broader property, political and supply chain risks, the report said.
“The interconnected nature of modern supply chains means that localized conflict events can have cascading effects on insured losses across multiple regions and industries,” it said.
“Energy companies, logistics providers and exporters operating in or near conflict zones may seek additional political risk insurance or terrorism coverage, which is becoming increasingly expensive,” the report noted. “The risk of retaliatory sanctions and financial system instability could heighten exposures for insurers active in global trade credit and political risk markets.”
Against this backdrop, insurers may also face “rising reinsurance costs or reduced capacity from global reinsurers, many of which are already cautious following years of significant natural catastrophe losses,” the report said.
Increased volatility in capital markets also has important implications for the insurance sector, DBRS said.
“For insurers, investment portfolio stability is a key component of credit quality,” it noted, as life insurers in particular rely on stable investment returns to meet long-term policyholder obligations.
“Sharp declines in equity markets can erode capital surplus, while widening corporate bond spreads may lead to mark-to-market losses on fixed income portfolios. Emerging market debt and equities — favoured by some insurers for yield enhancement — may come under pressure if the conflict intensifies or if global economic sentiment further deteriorates,” it said.
In response to these risks, insurers may shift their portfolios toward higher-quality, shorter-duration assets, but this could further pressure investment income, the report said.
Insurance regulators “may impose higher capital charges on insurers experiencing material asset impairments or credit migrations,” the report said.
“Liquidity strain could also emerge if policyholders withdraw funds or insurers are forced to realize losses to meet claim payments,” it added.