The rise in state sponsored violence has created new dynamics for the global defence industry and its insurers as the sector struggled with demand and geopolitical instability.

Broker Willis has said in the current unstable geopolitical environment, defence contractors face new challenges, with with skyrocketing demand but lagging production and insufficient collaboration between countries.

Sam Wilkin, director of political risk analytics at Willis, explained: “In the late 1990s and early 2000s, terrorist threats dominated the national security agenda. In retrospect, that concern was born in an era of extraordinary geopolitical stability, when conflicts involving states had dwindled to historic lows.

“Today, that stability has vanished. Non‑state actors remain disruptive, but the last few years have been shaped by the return of state‑sponsored violence. These threats occur on a much larger scale and therefore have driven a surge in defence procurement and a reshaping of global defence supply chains. For companies active in the sector, this shift in the risk landscape has strong implications for operations and future planning.”

The report, titled “Managing the new economic risks in the defence sector”, identified five economic risks confronting the defence sector today:

• Losing at the scale/sovereignty trade-off, as nations struggle between pooling defence resources for efficiency and preserving national control
• Tariff wars, with escalating trade barriers disrupting supply chains and raising costs
• China dependence, given the sector’s reliance on Chinese materials and components such as rare earths and electronics
• Phantom spending, where political pledges to increase defence budgets may not translate into actual future investment
• Failure to reindustrialise, as Western nations rediscover the need for industrial capacity but face difficulties rebuilding it

Beyond these current concerns, expert interviewees flagged two emerging threats tied to fiscal pressures: social backlash against defence spending and looming fiscal crises. With debt‑to‑GDP ratios exceeding 100% across much of Europe, North America, and Japan, governments risk “soft defaults” through inflation or financial repression. Rising defence budgets could create political grievance if they lead to higher taxes or cuts in social programmes, especially amid uncertain economic growth. These pressures may undermine long‑term defence commitments and create political instability.

Wilkin added: “Today, super-empowered non-state actors remain important- for instance, the Houthis in Yemen, exploiting new drone and unmanned surface vehicle technology, were able to disrupt global shipping. But in response, the Israeli and American governments have led repeated assaults on targets in Yemen.

“The U.S. operation to capture the Venezuelan president was a powerful illustration of the power of states against individuals. And with such government involvement in violent conflicts has come a surge in defence procurement. This surge was as unexpected as bin Laden’s 2001 attack. In Europe in particular, new defence orders have skyrocketed, but production has lagged behind. Will the pace of new orders be sustained, even if there is a lasting ceasefire in Ukraine?

“How will the defence industry be transformed as a result of surging European demand? How will rising tariff barriers, concerns about the security of supply chains and a major focus on re-industrialization reshape the sector?”

Evan Freely global head of Willis Credit Risk Solutions added: “Over the past two decades, a period of relative geopolitical calm has given way to a new age of instability.

“Since 2008, violent conflicts involving governments have surged, culminating in Russia’s 2022 invasion of Ukraine, the widening conflicts across the Middle East and the extraordinary U.S. operations in Venezuela.

“This return to intergovernmental warfare has upended assumptions about globalisation and spurred a dramatic rise in defence spending. Yet, even as defence procurement orders soar, the sector faces unprecedented structural, financial and strategic risks.”