# How the Insurance Industry Should Address Extreme Risks

How AI and War Risks Disrupt Actuarial Logic in the Insurance Industry

Geopolitical conflicts shake global financial markets, and the insurance industry faces extreme risk challenges. Recently, tensions in the Middle East have persisted, prompting international insurance and reinsurance companies to adjust war risk coverage, with cancellations, withdrawals, and significant premium increases in high-risk waters like the Strait of Hormuz. War and insurance may seem to belong to entirely different fields—safety and finance—but they are now deeply intertwined.

The core logic of insurance is based on the law of large numbers, relying on measurable, diversifiable, and hedgeable random risks to achieve loss sharing and financial smoothing. War, however, completely breaks this logic. Risks shift from predictable to unquantifiable, from individual losses to systemic shocks. War risk exposure is like an endless pit, making commercial insurance difficult to sustain. As the “shock absorber” and “stabilizer” of economic operation, the industry must develop strategies to cope with extreme risks. Rebuilding a risk protection system for such scenarios is both an industry development challenge and an economic security issue.

In standard commercial insurance policies—whether life or property—extreme risks like war and military conflicts are generally excluded. This is not due to a lack of responsibility but is dictated by actuarial models, capital constraints, and solvency regulations. When conflicts erupt, risks such as ship damage, cargo loss, asset freezes, and business interruption can occur simultaneously, far exceeding the capacity of a single insurer. Reinsurance chains also contract rapidly, ultimately leading to coverage gaps.

In fact, the impact of war on insurance goes far beyond short-term premium increases. First, the longer the war lasts, the more regional underwriting capacity shrinks. Reinsurance acts as a risk buffer for war coverage; when geopolitical risks surpass certain thresholds, reinsurers tend to tighten limits and raise prices. Primary insurers are forced to follow suit, creating a chain reaction of “reinsurance withdrawal—direct insurance suspension.” Second, war puts both sides of insurers’ balance sheets under pressure. It triggers volatility in global capital markets, exchange rate fluctuations, and asset devaluations, reducing investment income while increasing potential claims, making asset-liability matching more difficult. Lastly, claims rules and trust in insurance products face long-term challenges. War-related policies often involve disputes over coverage scope, cause of loss, and claim processing times. Major claims events test the integrity of contracts and regulatory resilience.

However, the insurance industry is not powerless in the face of war. It is developing a three-layer response framework. The first layer involves precise pricing and dynamic management. Insurers with underwriting capacity use real-time risk assessments, regional list adjustments, and individual voyage underwriting to convert uncontrollable war risks into manageable, priced risks—striking a balance between coverage and safety. The second layer relies on reinsurance and co-insurance networks. By leveraging global reinsurance markets and fostering cross-institutional, cross-regional co-insurance pools, the industry enhances its overall risk-bearing capacity. The third layer involves policy-based insurance and public risk mitigation. Areas beyond traditional commercial coverage—such as export credit insurance and national risk guarantee mechanisms—are used to protect key supply chains and overseas assets.

For China’s insurance industry, this crisis offers profound lessons. With overseas assets, shipping routes, and engineering projects worldwide, geopolitical risk exposure is expanding. On one hand, the industry must accelerate the development of war risk pricing and risk control systems, improving actuarial, underwriting, and claims capabilities under extreme scenarios. It should avoid blindly halting coverage or taking on risks beyond its capacity. On the other hand, strengthening policy-oriented export credit insurance and expanding coverage for overseas energy projects and critical logistics routes can enhance independent risk diversification. Additionally, integrating war and political risks into routine risk management helps prevent major losses.

War may define the boundary of commercial insurance, but it should not be the endpoint of risk protection. As modern economies grow more complex, the insurance industry must uphold safety margins; as geopolitical risks intensify, financial tools are needed to enhance resilience. The industry must adhere to commercial principles and solvency requirements while proactively innovating supply, supported by policy and international cooperation, to safeguard global supply chains, industrial chains, and capital flows. (Source: Economic Daily, Author: Yu Yong)