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As Wall Street races to incorporate war into its risk scenarios, the same people modeling natural catastrophes are now adapting their methodology to help investors, banks and insurers predict military conflicts.<\/p>\n
Since 2008, the number of countries engaged in external conflicts has nearly doubled to just over 100, while the economic impact of violence now stands at almost $22 trillion,\u00a0according to\u00a0the Institute for Economics and Peace. That\u2019s equivalent to more than 10% of the world\u2019s gross domestic product.<\/p>\n
Wars are upending the finance industry\u2019s ability to predict everything from the price of oil to the cost of a mortgage, and Wall Street has had to acknowledge that some long-standing risk models may no longer be fit for purpose. Citigroup Inc. warns against relying on \u201crear-view mirror\u201d models built on historical data, while Morgan Stanley says it\u2019s time to \u201crethink\u201d the status quo of geopolitical risks more broadly.<\/p>\n
\u201cInstead of looking back, insurers and investors increasingly want to know what might happen and where,\u201d Sam Haynes, head of data and analytics at Verisk Maplecroft, a global risk consultancy, said in an interview. \u201cThey want a predictive forward-looking view.\u201d<\/p>\n
Verisk, which is best known for its work on natural catastrophe models for insurers and cat-bonds investors, has just unveiled a model it says would have helped financial professionals predict the Iran war.<\/p>\n
The firm\u2019s Predictive War Index, released to clients in late May, uses a machine learning algorithm to forecast the likelihood of war occurring in a country over the next 12 months. It was trained on political, economic, and social datasets from 1995-2022 and therefore doesn\u2019t take the current Iran war into account. Even so, back-testing showed that had the model been ready in early January, it would have shown a 66% probability of war breaking out in Iran 1 1\/2 months later, according to Verisk.\u00a0<\/p>\n
The firm\u2019s other new model, the Geopolitical Relations Index, tracks the changing level of tension between pairs of countries. It looks at parameters such as whether they\u2019ve had military clashes in the past, how similar their styles of government are, or whether they\u2019re geographically close enough to project power.\u00a0<\/p>\n
A separate Verisk model, launched in October 2023, has in the period since then correctly predicted six out of seven government collapses, including the ouster of Bashar al-Assad in Syria in 2024, and the sudden removal of Venezuela\u2019s Nicolas Maduro in January.<\/p>\n
In the case of Maduro\u2019s removal, \u201cthere were economic issues combined with a past history of political instability that increased the risk,\u201d said Chris Boylan, a data science expert at Verisk Maplecroft.<\/p>\n
Rand Corporation has an artificial-intelligence model that turns complex and uncertain questions \u2014 such as regime change \u2014 into concrete probability estimates. The model draws in part on the aggregated opinions of people who aren\u2019t subject-matter experts to forecast a future scenario. When the model was run in mid-May, it showed a 20% likelihood that Iran\u2019s regime won\u2019t survive into 2027.<\/p>\n
\u201cThe results are designed not just to describe what might happen, but to show policymakers how specific actions \u2014 sanctions pressure, diplomatic engagement, or support for civil society \u2014 would shift those probabilities in practice,\u201d said\u00a0Anthony Vassalo, director of the RAND Forecasting Initiative.<\/p>\n
Traditional models often stop working in the current climate because an event like a trade blockade or the imposition of economic sanctions \u201cdoesn\u2019t behave like a standard-deviation move in a normal distribution,\u201d said Krishan Sharma, senior vice president \u2013 model risk management at Citi. \u201cIt changes the distribution entirely.\u201d<\/p>\n
The shipping disruption in the Strait of Hormuz has brought fresh attention to the extreme vulnerability of similar transport chokepoints around the world, requiring new risk algorithms for marine insurance and global trade. Shortly after the Iran war started on Feb. 28, Lloyds of London was quoting premiums for marine war risk in the Strait of Hormuz as high as 1% of a vessel\u2019s value per voyage, compared with just a fraction of a percent before the conflict, according to Moody\u2019s.<\/p>\n
On Sunday, Iran\u00a0pushed back\u00a0on US President Donald Trump\u2019s assertion the warring countries were about to sign an interim peace deal to reopen the Strait of Hormuz.<\/p>\n
Read More:\u00a0Trump Eyes Sunday Iran Deal But Tehran Says Still Reviewing Text<\/p>\n
Modeling experts are now looking at conflict scenarios as they would a terrorist attack, \u201cwhere relatively low?cost acts can generate disproportionate economic losses,\u201d said Gordon Woo, a catastrophe risk specialist at Moody\u2019s. With the new models, insurers can better assess how disruptions might unfold across shipping routes and supply chains rather than focusing solely on physical damage to individual assets, Woo said.<\/p>\n
Tina Fordham, co-founder of Fordham Global Foresight and Citigroup\u2019s former chief global political analyst, warns that geopolitical volatility hasn\u2019t just been normalized, it\u2019s\u00a0accelerating.\u00a0<\/p>\n
The events unfolding \u201care consistent with our supercycle geopolitics thesis, where increased risk drivers are breaking through global guardrails and causing a higher number of geopolitical shocks,\u201d she said on her website. \u201c2025 saw the acceleration of the supercycle and it marked a wake-up call for the C-suite.\u201d<\/p>\n
Aside from drawing on years of experience modeling natural catastrophes, risk experts are also tapping into methodologies used to help predict other threats such as\u00a0strikes, riots and civil commotion.<\/p>\n
The newer risk models will allow insurers \u201cto integrate a predictive view of war into their underwriting and exposure management workflows,\u201d Verisk said.<\/p>\n
Such tools are becoming essential for financial professionals trying to operate in \u201ca fragmented, multipolar world,\u201d as the old world that was shaped by \u201cglobalization-driven efficiency\u201d fades out of view, the Morgan Stanley Institute said in an April\u00a0report.<\/p>\n
War has now overtaken civil unrest as the source of political violence most feared by companies trying to buy insurance, according to a\u00a0risk assessment\u00a0published in May by Allianz.<\/p>\n
\u201cWar is a rising fear for businesses around the world,\u201d it said.<\/p>\n<\/div>\n
#Wall #Street #gaining #access #catastrophe #models #predict #wars<\/p>\n","protected":false},"excerpt":{"rendered":"
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