Briefing: The ‘Peace Dividend’ and its insurance equivalent

The recent scrutiny of the UK military’s lack of scale, poor state of readiness and limited ability to respond to events that unfolded in the Middle East has been embarrassing to say the least.

Reports highlighting a lack of scale, declining readiness and limited deployable capability have made for difficult reading. It reportedly took a week to deploy one Type 45 destroyer to Cyprus, but that is merely one example of a broader challenge.

As one of the many military veterans in our industry, and someone who was involved in the planning and deployment of the UK’s large scale contribution to the Second Gulf War, this debacle has perhaps impacted my sense of pride more than most.

Of the five Astute class attack submarines available to the UK, only one is available for deployment, with the remainder all in various states of repair or maintenance.

The surface fleet is in a similar state, resulting in the delay to get one of the six Type 45s ready to deploy and a similar picture with the seven ageing Type 23 frigates left in the fleet – of 16 originally built.

Beyond the headlines, it reflects a longer term trend that has gradually eroded capability across all three services.

The explanation is relatively straightforward. Following the end of the Cold War, successive governments understandably reduced defence spending.

The prevailing assumption was that the primary threat had diminished, allowing resources to be redirected elsewhere.

Defence became more focused on efficiency, cost reduction and extracting maximum value from existing capabilities, a phase which some may recognise currently within the industry at the moment.

Anaemic investment

The resulting ’Peace Dividend’ was a bucket every government chose to pillage as other demands increased.

Since the Covid-19 pandemic, for example, health-related benefit expenditure alone has increased by around £10bn per annum, compared with a total annual defence budget of approximately £60bn.

Whatever’s one’s political perspective, that increase alone is the equivalent of buying another Royal Navy surface fleet every few years.

The contrast with Britain’s response to the Argentine invasion of the Falklands in 1982 is striking. Within three days, a task force comprising aircraft carriers, nuclear attack submarines and a substantial surface fleet was sailing south. Ultimately, more than 100 vessels, including requisitioned civilian ships, took part in the operation.

That was only 40 years ago. Given the average lifespan of a Royal Navy warship is around 30 years, its remarkable that within less than two generations the number of destroyers and frigates has fallen from 64 to 13, with the number fully available for operations often lower still.

Aside from the anaemic investment, one of the enduring criticisms of military planning is that armed forces often invest for the last conflict – rather than the next one.

Following the end of the Cold War, the attacks of 11 September 2001 fundamentally reshaped Western defence priorities. For the next two decades, military planning focused heavily on counterinsurgency and counter terrorism operations. Defence spending adjusted accordingly and the UK’s ability to fight peer on peer wars declined even further.

Today, the conflict in Ukraine, has forced defence planners to adjust once again. Alongside conventional warfare, military leaders must now contend with cyber warfare, autonomous systems, space-based capabilities and AI-enabled decision making.

The Russian invasion of Ukraine has raised the spectre of the UK being involved once again in state on state conflict. This war has demonstrated that military advantage no longer belongs exclusively to those with the largest budgets. Small drones, commercially available technology and rapid innovation cycles have fundamentally altered the economics of warfare. Adaptability increasingly matters as much as scale.

Insurance equivalence

In many respects, insurance faces similar challenges to our armed forces.

Traditional risk models were built around physical assets, historical claims experience and relatively predictable patterns of loss. Yet many of today’s most significant threats are intangible, interconnected and evolving at extraordinary speed.

Cyber attacks, AI-driven fraud, supply chain disruption, climate volatility, geopolitical instability, reputational damage and data governance are now firmly established as boardroom concerns.

Many of these risks either did not exist or were considered niche exposures twenty years ago.

Perhaps the most interesting comparison concerns technology and investment priorities. In soft market conditions, organisations naturally focus on operational efficiency, cost control and short term profitability. In some respects, this can have the same impact as the peace dividend where investment is concerned.

Investment in future capabilities can become harder to justify when current risks appear well understood and manageable.

Clients are deploying AI tools across their businesses at extraordinary speed. New applications emerge almost weekly. Employees can now access capabilities that were unavailable even a year ago. Yet underwriting frameworks, policy wordings, risk assessment methodologies inevitably evolve more slowly.

The question for the industry is whether insurance can keep pace with the risks created faster than they can be fully understood, modelled or insured.

Prediction to adaptability

Perhaps the biggest lesson from defence, and in particular from the war in Ukraine, is that resilience comes less from accurately predicting the next threat and more from building the capacity to adapt quickly when it emerges.

Ukraine’s armed forces, despite beginning the conflict at a significant disadvantage, have repeatedly demonstrated how innovation, agility and rapid decision making can offset shortcomings in scale and resources.

For decades, defence reviews attempted to identify the most likely future conflict. Few predicted 9/11, Isis, hybrid warfare or the transformational role drones would play on the modern battlefield.

Likewise, insurers are unlikely to predict every emerging risk created by AI, biotechnology, quantum computing or future geopolitical shocks.

The winners in both sectors may therefore be those that shift their focus from forecasting specific threats and towards building organisations capable of responding rapidly to uncertainty.

In defence, that means adaptable forces and flexible capability. In insurance, it means agile underwriting, faster product development, better data utilisation and closer engagement with clients’ evolving risk environments, as well as brokers and underwriters who can keep pace with these emerging risks.

The central question for both sectors is remarkably similar: are we investing merely to manage today’s risks more efficiently, or are we building the capabilities needed to address tomorrow’s risks before they become tomorrow’s crises?

The lesson from both defence and insurance may ultimately be the same. The future rarely arrives in the form we expect. Organisations that succeed are not necessarily those that predict every threat correctly, but those that retain the capacity to adapt when the unexpected occurs.