As global conflicts increasingly destabilize financial markets, Wall Street is turning to advanced modeling tools traditionally used for natural catastrophes to predict the economic impacts of war. According to the Institute for Economics and Peace, the economic toll of violence has surged to nearly $22 trillion, equivalent to over 10% of global GDP. This shift underscores the growing need for predictive analytics in the face of escalating geopolitical uncertainty.
New Tools for a New Era
Verisk Maplecroft, a global risk consultancy, has introduced the Predictive War Index, a machine learning algorithm designed to forecast the likelihood of war in a country within the next 12 months. Trained on political, economic, and social datasets from 1995 to 2022, the model claims to have accurately predicted the Iran war. Back-testing revealed a 66% probability of conflict just weeks before it erupted.
'Instead of looking back, insurers and investors increasingly want to know what might happen and where,' said Sam Haynes, head of data and analytics at Verisk Maplecroft.
Verisk has also launched the Geopolitical Relations Index, which tracks tensions between countries based on historical conflicts, government similarities, and geographic proximity. Additionally, a separate model introduced in October 2023 has correctly predicted six out of seven government collapses, including the ouster of Syria’s Bashar al-Assad and Venezuela’s Nicolas Maduro.
Rethinking Risk Management
Traditional financial risk models, often reliant on historical data, are proving inadequate in today’s volatile geopolitical landscape. Citigroup Inc. warns against using 'rear-view mirror' models, while Morgan Stanley advocates for a broader reassessment of geopolitical risk frameworks. The shipping disruptions in the Strait of Hormuz have further highlighted the need for updated risk algorithms, particularly for marine insurance and global trade.
Rand Corporation has also entered the fray with an AI-driven model that quantifies the probability of regime changes. In May, the model predicted a 20% chance that Iran’s regime would not survive into 2027, emphasizing the role of strategic actions like sanctions and diplomatic engagement in shaping outcomes.
As Wall Street grapples with the complexities of modern conflict, these tools represent a critical step toward safeguarding American financial interests in an increasingly unpredictable world.