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For decades, the global economy has been underpinned by a relatively stable assumption: risk, where it could be priced, would be absorbed by the private sector. Insurers would underwrite it. Investors would allocate capital to it. Markets would distribute it across enough independent pools that no single shock could overwhelm the system. That assumption is now being tested in ways that are no longer theoretical.
Across multiple domains simultaneously, climate, geopolitics, cyber and systemic economic risk, there are growing signs that private capital is becoming more selective, more cautious and, in some cases, withdrawn entirely. The shift is not always dramatic. It often begins gradually: reduced insurance capacity in high-risk regions, higher premiums with tighter terms, investors reallocating away from exposed geographies, infrastructure projects becoming harder to finance. At first it looks like repricing. Beyond a certain threshold, it becomes something else entirely. Capital is not just more expensive. It is no longer available at all.
Private capital does not withdraw arbitrarily. It retreats when risk becomes difficult to model, increasingly correlated with other risks, or simply disproportionate to the return it offers. In recent years, all three conditions have become more visible simultaneously. Climate-related losses are rising in both frequency and severity. Geopolitical tensions are introducing sudden, binary shifts in risk exposure. Economic volatility is compressing margins and extending uncertainty further into the future than most pricing models are designed to handle.
The result is that certain risks are no longer simply expensive. They are becoming, from a private market perspective, unattractive. And when markets find a risk unattractive, they create a gap: a space between the risks that exist in the world and the risks that markets are willing to absorb. That gap does not disappear. It has to be filled by someone.
Nowhere is this dynamic more visible than in property insurance in climate-exposed regions. In California, major carriers including State Farm and Allstate stopped writing new home insurance policies entirely, citing what State Farm called catastrophe exposure beyond acceptable limits. The California FAIR Plan, the state’s insurer of last resort, designed as a temporary backstop for a small number of genuinely uninsurable properties, grew from 140,000 policyholders in 2018 to over 610,000 by mid-2025, a fourfold increase in seven years. When the Los Angeles wildfires struck in January 2025 and generated an estimated $40 billion in insured losses, the FAIR Plan’s reserves and reinsurance coverage were both exceeded. It received a $1 billion emergency bailout, half assessed on the insurance industry and half recovered as a surcharge on every California home insurance policyholder.
Florida tells the same story in a different register. Between 2019 and 2024, multiple private insurers withdrew from the state’s most at-risk areas, six insurers became insolvent following Hurricane Ian in 2022, and Citizens Property Insurance Corporation grew to 1.4 million policyholders before concerted efforts partially reversed the trend.
These are not isolated market failures. Across the United States, an estimated 14% of owner-occupied homes are now uninsured, up sharply from 5% in 2019. The Swiss Re Institute has estimated the global insurance protection gap at $1.83 trillion in premium equivalent terms. When FEMA’s disaster relief fund exhausted nearly half its annual budget in the first eight days of the 2025 fiscal year following Hurricanes Helene and Milton, it illustrated precisely what the withdrawal of private capital means in practice: the state absorbs the shock, with less capital, less actuarial sophistication and more political constraint than the private markets it has been asked to replace.
If the California story illustrates the slow retreat of private capital from climate risk, events in the Strait of Hormuz in early 2026 illustrate how quickly that retreat can happen when geopolitical risk becomes acute, and how immediately the state must respond.
On 28 February 2026, the United States and Israel launched coordinated airstrikes on Iran. Within 48 hours, war risk insurance premiums for vessels transiting the strait surged from around 0.25% of hull value to between 5% and 10% per transit, an increase that translated to tens of millions of dollars for a single voyage on a large tanker. All 12 members of the International Group of P&I Clubs, which collectively provide liability cover for approximately 90% of the world’s ocean-going tonnage, issued 72-hour notices of cancellation of war cover across the Gulf. Lloyd’s Joint War Committee redesignated the entire Arabian Gulf as a conflict zone. Tanker traffic collapsed by more than 80%.
What is most striking about this sequence of events is the order in which they occurred. Insurance closed the Strait of Hormuz before Iran’s navy did. The commercial shutdown preceded the physical blockade. The weapon was not the kinetic action but the coupling of the modern insurance architecture: the interlocking system of P&I clubs, reinsurance layers and war committee designations that is so tightly integrated that a single repricing event cascades through the entire market within hours. The strait, through which roughly 20% of the world’s seaborne oil and gas transits, was rendered effectively impassable by commercial logic before military force made it physically dangerous.
The state’s response was immediate and revealing. President Trump directed the US Development Finance Corporation, an agency whose mandate had previously focused on mobilising private capital in emerging markets, to establish a $40 billion reinsurance facility covering hull, cargo and liability risks for ships transiting the Gulf. The US government became, in real time, the reinsurer of last resort for one of the world’s most critical energy corridors. It is a precise and dramatic illustration of the thesis: private capital exits, and the state steps in to fill the gap, regardless of whether it was designed or resourced for that role.
Beyond insurance, the withdrawal of capital is reshaping where private investment is willing to go. BlackRock’s Geopolitical Risk Indicator reached elevated levels in early 2026, reflecting what the firm described as a fundamental reshaping of US economic and geopolitical relationships that is accelerating fragmentation across the global system. Wellington Management, assessing the structural outlook, noted that the combined pressures of great-power competition, a fragmenting global order and the longer-term impacts of climate change are driving investors to position for structurally higher inflation, lower growth and more differentiated outcomes by region and geography.
The practical consequence is a growing concentration of private capital in a narrowing set of markets deemed sufficiently stable and predictable to justify long-term commitment. Investors are pulling back from high-risk jurisdictions in energy exploration, from frontier markets carrying elevated political risk, and from long-horizon infrastructure projects in regions where the policy environment is uncertain. McKinsey’s Global Private Markets Report for 2026 noted that overall investment and deal activity remain well below historical highs, with momentum concentrated in a narrowing set of sectors. Where private investment retreats, the infrastructure does not build itself. Governments are stepping in, through development finance institutions, state-backed investment vehicles and direct public expenditure, to fund projects that private capital has decided are too risky to take on alone.
What is emerging is not a clean transition from private to public risk-bearing. It is something more unstable: a fragile equilibrium in which risk is neither fully absorbed by markets nor fully managed by the state, but sits in the space between them, unevenly distributed, inadequately funded and politically contested.
The increasing role of the state introduces its own complications. Fiscal space is constrained. Global sovereign debt is at historic highs. KPMG projects global growth slowing to 2.8% in 2026, the slowest since the pandemic, at precisely the moment when governments are being asked to expand their role as risk-bearers. State insurance programs are growing faster than their capital bases can support. The DFC’s $40 billion Hormuz facility was announced in a social media post, representing a fundamental expansion of the agency’s mandate that had not been planned, resourced or subjected to actuarial review. That is the nature of the state stepping in as insurer of last resort: it happens reactively, under pressure, without the institutional preparation that the scale of the role requires.
Government intervention can stabilise markets. It can also distort them, creating dependencies, crowding out private capital that might otherwise return, and concentrating risk in institutions ultimately backed by taxpayers with no choice in the matter. The Geneva Association has warned directly that society ultimately bears the cost of fragmentation: as private capital retreats, firms and individuals have less coverage and less support, with the most vulnerable communities the most exposed.
For business leaders, this shift introduces a different operating reality, one that is not yet fully reflected in most corporate planning or risk frameworks.
The first reality is that the cost of risk is rising and will continue to rise in ways that vary sharply by location, sector and asset type. Properties in climate-exposed regions are becoming harder and more expensive to insure. Supply chains running through geopolitically contested areas carry elevated and volatile risk premiums. Operations in markets where private investment has retreated face infrastructure gaps and financial system gaps that can directly affect business performance. These are not tail risks to be modelled in stress scenarios. They are structural features of the environment that need to be priced into strategy.
The second reality is that risk can no longer always be transferred or externalised efficiently. For much of the past generation, organisations could assume that insurance markets, capital markets and global diversification would absorb most of their exposure. As these mechanisms weaken, risk becomes more concentrated within the system itself, and increasingly within the organisations operating in that system. The question is no longer simply whether a given risk can be transferred. It is: if it cannot be transferred, how do we operate with it? That is a fundamentally different question, and most organisations have not yet built the strategic and operational capability to answer it well.
The third reality is that the expanded role of public capital creates genuine opportunity as well as constraint. Where governments are backstopping risk and funding resilience infrastructure, there are commercial opportunities for businesses positioned to work in partnership with public capital rather than in competition with it. Development finance, adaptation technology, political risk insurance and resilience infrastructure are all areas where the retreat of traditional private capital is creating new market space for organisations willing to understand the changed landscape and act accordingly.
The deeper issue is not just the availability of capital. It is what the withdrawal of capital signals. When private markets reprice or exit a risk, they are communicating something: that the risk is not well understood, not easily diversified, or not manageable within existing frameworks. That signal deserves to be taken seriously, not just as a market event but as a strategic indicator.
The idea that markets will always absorb risk is becoming less reliable as a planning assumption. In its place, a different reality is emerging. Some risks will remain uninsured. Some investments will not be made. Some exposures will sit with governments, and some will sit with organisations themselves. The organisations that succeed in navigating this reality will not be those that assume risk can always be externalised. They will be the ones that have built the capability to understand when it cannot, and the strategic flexibility to operate effectively in that condition.
Capital in retreat is not just a financial phenomenon. It is a signal about the world we are now operating in. The organisations that read that signal clearly, and respond to it with strategic intent rather than reactive adjustment, will be the ones best positioned for what comes next.
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