Middle East conflict exposes recurring insurance ‘protection gap’

Historically, insurance policies across many sectors have been structured for relatively stable operating conditions. However, escalating geopolitical tensions are causing organisations to face prolonged regional conflicts, rapid escalation risk, evolving sanctions regimes and increasing regulatory and state intervention.

• Read more: what the Middle East conflict means for your business

The specific challenges these developments pose for the insurance market have been brought into sharp relief following the outbreak of hostilities in the Middle East. Between late February and early March, reports emerged that a handful of maritime insurers were pulling their war risk cover for vessels operating in the Strait of Hormuz.

However, on 23 March the Lloyd’s Market Association (LMA) – the market body for Lloyd's of London – issued a statement confirming that although notices of cancellation had been issued, these were a standard provision already built into shipowners’ contracts to allow flexibility for renegotiation in the event of an “increased risk to vessels”.

In fact, such notification mechanisms are specifically designed to allow war premiums to remain very low during peacetime. This allows plenty of scope for them to be reassessed when risk does increase.

In the week following commencement of the conflict, the LMA conducted a survey of the main participants in the Lloyd’s marine war market. Among respondents, 88% said they continued to have an appetite to underwrite international linked hull war risks, while more than 90% said they would continue to have an appetite to underwrite international linked cargo. In other words, the LMA concluded that the issue was not that insurers were unwilling to provide cover. Rather, the ongoing conflict raised questions over whether the risk to crew and vessel safety was simply deemed “too high”.

As with the war in Ukraine, the escalating conflict in the Middle East has given insurers considerable pause for thought. There is evidence that the market is already adapting to these heightened geopolitical tensions and expanding sanctions risk. In the case of marine war insurance policies, which typically cover hull and cargo separately, some insurers have already taken innovative steps to introduce new products that combine hull and cargo war risk cover across the Gulf.

Minding the ‘protection gap’

For businesses operating in the Middle East, Ukraine or other conflict zones, these recent heightened exposures underline that a valid insurance policy and a valid claim do not necessarily guarantee recovery. This makes sanctions wording, payment provisions and reinsurance dependencies critical considerations well before a loss occurs.

As insurers’ capacity has tightened in higher‑risk jurisdictions, many are increasingly adopting more restrictive policy wording, particularly around cyber exposure, war exclusions and state‑backed hostile activity. Cover remains available but is more selective and significantly more complex to structure and negotiate than in previous years.

These pressures are having tangible commercial consequences, affecting supply chains, revenue flows, contracted performance and asset security. Businesses operating across the maritime, oil & gas, air cargo, agricultural, pharmaceutical and technology sectors, as well as manufactures and distributors of other critical products, are increasingly feeling the impact. What were once viewed as remote or theoretical risks are increasingly material balance‑sheet exposures.

In practice, this has exposed a recurring ‘protection gap’. Standard property and operational policies frequently exclude war‑related risks. Political risk cover is often narrower than expected and different policies are commonly placed in silos that fail to operate coherently when a loss occurs.

Even where war or political risk is addressed, less visible exposures can create significant uninsured losses. Silent cyber risk, uncertainty where cyber incidents overlap with geopolitical events, supply chain disruption and limited or absent contingent business interruption cover can all sit outside standard policy wording.

For many businesses, the largest losses arise not from physical damage, but from the inability to operate, perform contracts, receive payments or access critical infrastructure. These risks are often underestimated at placement stage.

The 2019 attacks on Saudi Aramco’s Abqaiq and Khurais facilities highlighted how classification disputes – whether an incident is treated as war, terrorism or hostile action – can determine policy response and recovery. Similarly, in the Kurdistan region of Iraq, ongoing delays in public sector salary payments continue to test the extent to which political risk insurance can respond to payment delays or state interference if technical policy triggers are not satisfied.

Even where cover exists on paper, recoveries are rarely straightforward. Claims can be complicated by disputes over causation, classification and compliance with policy conditions, while sanctions and regulatory restrictions may delay, restrict or prevent payment altogether.

In this environment, the critical issue for businesses is not simply whether insurance has been purchased, but whether it will operate effectively in practice. Well‑designed policies align different lines of cover, including property damage, business interruption, political risk, trade credit, marine and war risk, to prevent protection gaps emerging when an incident occurs.

They are also tested against realistic scenarios such as conflict escalation, sanctions exposure, supply chain disruption, payment blockage and infrastructure failure, rather than relying on assumptions made at placement stage.

For businesses, preparation must be increasingly decisive. Targeted policy audits, claims‑readiness planning and early engagement with brokers, insurers and legal advisers can significantly influence recovery outcomes. In a volatile geopolitical environment, business certainty is driven by planning, structure and clarity, not by policy limits alone.