Political risk becoming central to defence sector growth, Willis report warns

The global defence industry is facing a mismatch between demand and its ability to deliver, creating a risk environment that has implications for insurers, lenders and risk managers, according to a new report from Willis and Oxford Analytica.

The report, Managing the new economic risks in the defence sector, published in January 2026, drew on interviews with senior defence executives across Europe, North America and Australia. It concluded that while geopolitical instability has driven an increase in defence procurement, structural constraints, fiscal pressure and fragmented supply chains are undermining the sector’s long-term resilience.

Willis said violent conflicts involving governments have risen since around 2008, with Russia’s invasion of Ukraine marking a definitive break from what had previously been seen as a rules-based international order.

This shift has resulted in a rapid and largely unplanned expansion in defence procurement, fundamentally altering risk profiles across the sector.

Sam Wilkin, director of political risk analytics at Willis, said that while non-state actors remained disruptive, the return of state-on-state conflict had driven a surge in defence spending and reshaped global supply chains.

“For companies active in the sector, this shift in the risk landscape has strong implications for operations and future planning,” Wilkin said.

From an insurance perspective, the speed of this transition has been noteworthy. Sudden demand shocks have stretched production capacity, contract backlogs have grown faster than delivery capability and long-tail political risk exposure has increased for defence manufacturers and their financiers.

Legacy underwriting assumptions, developed during a period of relative geopolitical calm, no longer hold.

Five fragmented economic risks

Executives interviewed for the report identified five core economic risks now confronting the defence sector. These were the scale-sovereignty trade-off, tariff wars, dependence on China for critical materials, so-called phantom spending and the failure of western economies to reindustrialise at pace.

The scale-sovereignty dilemma was ranked as the most pressing issue. Governments want to retain national control over defence capabilities, while manufacturers need scale and coordination to reduce costs and deliver efficiently.

In Europe, this tension is increasingly resulting in fragmentation rather than cooperation, with funding often restricted to domestic or EU-based suppliers.

For insurers, this fragmentation heightens project delay risk, cost overruns and the likelihood of cross-border contract disputes.

Meanwhile, China dependence was described as an uncomfortable but persistent reality. Western defence supply chains remain heavily reliant on Chinese rare earths, electronics and other components, creating a low-probability but high-impact exposure should geopolitical tensions escalate.

The report also warned of phantom spending, where political commitments to raise defence budgets fail to translate into sustained industrial investment.

These risks are compounded by the complexity of defence procurement. To note, procurement cycles are often measured in years, or even decades, meaning technology acquired today may only translate into operational capability long after the original investment decision.

In a period of acute socioeconomic pressure, this lag makes it harder for governments to provide a credible backstop for worst-case scenarios while balancing competing fiscal demands.

For many Nato nations, this challenge is exacerbated by years of underinvestment. Several member states have historically failed to meet the alliance’s recommended defence spending target as a share of GDP, with Spain among those still falling short. Rebuilding capacity after decades of limited military expenditure is no small feat.

Fiscal risks

Beyond industrial constraints, Willis highlighted emerging fiscal risks, including the potential for social backlash against defence spending and the threat of future fiscal crises.

With debt-to-GDP ratios exceeding 100% across much of Europe and North America, rising defence budgets could fuel political grievance if they lead to higher taxes or cuts to social programmes.

For the insurance market, the report suggests that political risk insurance and trade credit cover are not peripheral issues but central to enabling defence sector growth.

As Europe’s defence expansion continues, insurers are increasingly being asked to underwrite not just physical risk, but the political, fiscal and supply chain uncertainties that now define the sector’s operating environment.