New predictive tools are giving investors, banks, and insurers a way to assess the risk of military conflicts before they erupt.
In parallel with geopolitical tensions, Wall Street is increasingly relying on advanced forecasting models to measure the financial risks of war. Firms that once specialized in predicting natural disasters are now adapting their methods to help investors, insurers, and banks anticipate global conflicts.
Key Details
The need for better forecasting is growing. Since 2008, the number of countries involved in external conflicts has nearly doubled to more than 100, while the economic cost of violence has climbed to nearly $22 trillion, according to the Institute for Economics and Peace.
Risk consultancy Verisk recently launched its Predictive War Index, a machine-learning model designed to estimate the likelihood of war in a country over the following 12 months. Based on historical political, economic, and social data from 1995 to 2022, the model showed a 66% probability of war breaking out in Iran roughly six weeks before the conflict began.
Verisk also introduced a Geopolitical Relations Index that tracks tensions between countries using factors such as military history, political systems, and geographic proximity.
Another Verisk model has successfully predicted six of seven government collapses since late 2023, including the fall of Bashar al-Assad in Syria in 2024 and the removal of Venezuela's Nicolas Maduro earlier this year.
Meanwhile, RAND Corporation has developed forecasting tools that assign probabilities to major geopolitical outcomes. One recent forecast estimated a 20% chance that Iran's current regime will not remain in power through 2027.
Market Reaction
Geopolitical shocks are forcing financial institutions to rethink traditional risk models. Citigroup has warned against relying solely on historical data, while Morgan Stanley has urged businesses to reassess geopolitical risk frameworks.
The impact is already visible in global trade. Following the outbreak of the Iran conflict, marine war-risk insurance premiums in the Strait of Hormuz surged to as much as 1% of a vessel's value per voyage, compared with only a fraction of a percent before the crisis.
Markets are also closely watching ongoing negotiations between the United States and Iran after both sides agreed to reopen the Strait of Hormuz, though key details remain unresolved ahead of talks scheduled for June 19 in Switzerland.
Why It Matters
For traders and investors, geopolitical events can trigger sudden moves across oil, currencies, shipping, insurance, and equity markets. New forecasting tools could provide earlier warnings of potential disruptions and help firms better manage exposure.
Predictive war models are rapidly moving from niche research tools to essential parts of risk management. Investors will be watching closely to see whether these systems can consistently identify the next major global flashpoint before it impacts markets.
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