Australia’s next insurance shock is already here and it is not where most boards are looking

As the Middle East conflict continues to disrupt global energy markets, Australian businesses are confronting a familiar threat in an unfamiliar form. This is not a direct war risk in the traditional sense. It is something more insidious, a fuel driven economic shock that is rapidly cascading into balance sheets, boardrooms and ultimately insurance claims.

Australia’s structural dependence on imported refined fuel leaves it uniquely exposed. Around 90 per cent of Australia’s liquid fuel is imported, meaning global supply disruptions translate quickly into domestic price shocks. When supply chains tighten and oil prices rise sharply, the impact is immediate. Diesel costs increase, freight becomes unpredictable, margins compress and for many businesses already operating on thin buffers, the consequences are not incremental, they are existential.

What is less well understood is how quickly this macroeconomic shock translates into financial lines insurance risk.

Directors and officers insurance will be the first to feel it. Earnings volatility driven by fuel and input cost inflation is already putting pressure on listed companies to revise guidance. Where disclosures lag reality or where risk management appears inadequate in hindsight, litigation tends to follow. Australia already has one of the most active securities class action environments outside the United States.

A sustained period of earnings disruption increases the likelihood of further claims, particularly where companies fail to adequately disclose exposure to cost pressures or supply chain fragility. Trade credit insurance is, simultaneously, moving quietly but decisively into a harder phase. Rising operating costs are eroding working capital across transport, manufacturing and agriculture. Even modest deterioration in payment times can trigger insurer concern.

Insolvencies in Australia have already risen materially over the past two years, with ASIC reporting more than 11,000 corporate insolvencies in 2024, up significantly on prior years. In that environment, credit insurers are likely to tighten limits, increase premiums and reduce appetite for higher risk sectors.

Professional indemnity exposure is also building beneath the surface. Advisers, consultants and project managers are being asked to make forecasts in an environment where key variables including fuel costs, inflation and interest rates are shifting rapidly. Construction costs alone have risen by more than 30 per cent since 2020 according to industry indices, placing pressure on project viability and increasing the likelihood of disputes. When projects run over budget or strategies fail to deliver, the question of whether advice was reasonable at the time becomes fertile ground for claims.

Overlaying all of this is a growing geopolitical dimension. Cyber risk typically increases during periods of international conflict, particularly where state aligned actors are involved. Meanwhile, supply chains become more fragile as critical shipping routes are disrupted. The Strait of Hormuz, through which roughly 20 per cent of global oil supply passes, remains a key vulnerability. Disruption at that scale has direct consequences for energy prices, logistics and contract performance. Contracts that once appeared robust begin to fail under the strain of delays, cost escalation and counterparty stress. These are not isolated operational issues, they are triggers for financial loss and insurance claims.

In short, what begins as a fuel shock quickly becomes a governance challenge.

Boards should be asking hard questions now.

• Boards should be asking hard questions now. 
• How resilient is the organisation to sustained fuel price volatility?
• Are supply chains sufficiently diversified?
• Is there adequate liquidity to absorb prolonged cost pressure?
• And critically, are these risks being assessed by management and boards and disclosed clearly, in real time and in compliance with market disclosure obligations?

The responsibility, however, does not sit with corporates alone. Insurers also face a defining moment and need to plot a course swiftly and adeptly by:

• moving beyond blunt exclusions and engaging more deeply with client risk. Broad geopolitical or war related exclusions may protect balance sheets in the short term, but they do little to support clients navigating complex and interconnected risks. A more nuanced approach that differentiates between direct conflict exposure and second order economic impacts will be essential.
• making underwriting more dynamic. Annual renewal cycles are poorly suited to a world where risk conditions can shift materially within months. Greater use of real time data, scenario modelling and stress testing should inform pricing, capacity and coverage decisions.
• repositioning themselves as partners in resilience rather than simply providers of risk transfer capital. This means supporting clients with insight on supply chain risk, fuel hedging strategies and governance practices. Further, recognising and rewarding businesses that demonstrate strong risk management through more favourable underwriting outcomes.
• encouraging product innovation. Coverage for non damage business interruption, supply chain disruption and contingent financial loss has historically been limited or difficult to access. In the current environment, these areas are becoming central to how risk is transferred and managed.

The alternative is a familiar but flawed cycle in which insurers retreat, capacity tightens, premiums rise and coverage gaps widen just as systemic risk is increasing.

Comment

Australia is unlikely to be directly drawn into conflict in the Middle East. But economically and from an insurance perspective, it is already exposed.

The fuel shock is here. The financial lines consequences are following close behind. The question now is whether insurers and businesses respond with foresight or simply wait for the claims to arrive.