Wall Street Adopts War Risk Models

Wall Street is increasingly incorporating war and geopolitical risks into its financial models, moving beyond traditional historical data-based approaches. Companies like Verisk Analytics and RAND Corporation are at the forefront, developing new predictive models. Verisk Analytics has unveiled its Predictive War Index and Geopolitical Relations Index, which use machine learning to forecast the likelihood of war and track international tensions. These models have demonstrated success in predicting government collapses, such as those of Bashar al-Assad in Syria and Nicolás Maduro in Venezuela. The RAND Corporation has also developed an AI model for estimating regime change probabilities. The need for these advanced tools is highlighted by recent events like the Iran war and shipping disruptions in the Strait of Hormuz, which have significantly impacted marine insurance premiums and global trade. Financial institutions like Citigroup and Morgan Stanley are advocating for a rethinking of geopolitical risk assessment, recognizing that traditional models are no longer sufficient in a rapidly accelerating and fragmented geopolitical landscape. The overall sentiment among businesses, as noted by Allianz, is a rising fear of war, driving the demand for more sophisticated risk management solutions.