When allies of President Trump went on television over the weekend to say that a peace agreement between the U.S. and Iran was 95% complete, I was reminded of a truism among software developers in the 1990s: "The first 80% of a project takes 90% of the time, and the final 20% takes 90% of the time."
Comments on social media noted that even if negotiators had made it through 95% of the issues on their checklists, that progress meant that the U.S. and Iran still had to agree on what to do about Iran's stockpile of enriched uranium, about reopening the Strait of Hormuz and about U.S.-led economic sanctions against Iran. You know, the little stuff.
While there have been more reports today on potential progress, I'm ready to call it. Having covered an international mess or two in my time, I think the situation in Iran has all the markings of a long-term impasse. I'm convinced Iran will be an open wound for many years to come. The best we can hope for, I believe, is the sort of "ceasefire war" occurring in Gaza, where the fighting has officially been ended but the underlying conflict still festers.
Insurers need to prepare themselves.
I'll still hold out hope that President Trump can achieve the kind of agreement with Iran he's been promising: reopening the Strait of Hormuz to any and all traffic, without tolls, while removing Iran's ability to ever build a nuclear weapon. But I no longer think any such resolution is likely. I don't even think a clean, lasting agreement is possible.
The clincher for me came this morning, when I read a column in the Washington Post by a former colleague of mine from the Wall Street Journal, Karen Elliott House, who is as plugged in to the Middle East as any journalist could possibly be. Karen won a Pulitzer Prize for her coverage of the Middle East in the 1980s and has stayed plugged in to the point that last year she published the definitive biography of Saudi Crown Prince Mohammed bin Salman.
She wrote: "When the U.S. and Israel unleashed a blistering bombing campaign striking more than 10,000 Iranian targets, and Tehran’s response included attacks on Saudi oil installations and military bases, the Saudi air force initially struck back. But as President Donald Trump tolerated a ceasefire longer than the war itself, and repeatedly threatened to resume hostilities only to back off, the crown prince concluded that he must live with a hostile regime in Tehran. His focus now will be on placating Iran to protect Saudi."
If the Saudis have switched to appeasement — and I believe Karen implicitly — they leave Trump with almost no choice. Even if he felt he could ignore the need for congressional approval of a conflict lasting more than 60 days, under the War Powers Act, or could win approval from a Republican Congress increasingly nervous about an unpopular war as we head into the mid-term elections, Trump isn't going to resume hostilities without support from this major Middle Eastern ally. That means he's left having to negotiate with an extremist, theocratic regime that, by all accounts, thinks it has won the war.
Whatever deal ensues, Trump will surely claim a major victory, but Iran will remain volatile. Having shown the world that it can close the Strait of Hormuz, even while under attack by the world's greatest military power, Iran will keep shippers on edge, thus keep oil markets nervous. Iran will surely retain enough of a pathway to nuclear weapons that there will be the prospect of additional air strikes like the one the U.S. and Israel carried out on Iran last summer. If the U.S. eases economic sanctions, as Iran is demanding, Iran will surely funnel some of that money to its proxies throughout the Middle East as they try to destabilize Israel, Lebanon, and Yemen.
Because the Middle East is so unlikely to return to the conditions before the war, insurers should assume that conditions today will persist for at least many quarters and probably many years.
Shipping patterns will adjust to the higher risks in the Strait of Hormuz, and insurers will have to adjust to those new patterns. Global supply chains for all sorts of goods will change, keeping replacement parts for cars hard to get and limiting access to housing materials, so pressure on premiums will continue.
Gasoline prices will drop somewhat but remain steep, keeping a lid on traffic and, thus, traffic accidents. People will fly less, in the face of increased air fares, reducing the demand for travel insurance. With gas prices driving inflation, interest rates are likely to stay elevated; the housing market is already a disaster, and sales will stay depressed, reducing opportunities for homeowners insurance companies to attract new customers.
And so on.
There will surely be secondary effects, too, though those are obviously harder to predict. The big question, for me, relates to the mid-term elections. With Trump's approval ratings already at record lows, and with Iran looking like a strategic error, the Republican party will almost certainly lose control of the House of Representatives and perhaps even the Senate. All those investigations that the Democrats have talked about wanting to launch into Trump administration actions could become reality next year. Democrats may be a bit cautious because some of the investigations they launched in the lead-up to the 2024 election backfired and let Trump generate support — or they may not. The federal government could pretty much shut down until the 2028 presidential election as Democrats and Republicans scream at each other. Meanwhile, issues that are important to the insurance industry, such as the fates of FEMA and the National Flood Insurance Plan, would be set aside.
My second biggest question relates to Taiwan. Might China decide that now is a good time to try to retake control of the island, with the U.S. looking weak and having used up so much of its weapons stockpile in Iran? What a catastrophe that would be for the whole global economy.
But now I'm getting really speculative. We'll have to wait and see how the secondary and tertiary effects unfold. For now, I really just wanted to note that I don't believe we'll have a clean resolution of the U.S.-Israel conflict with Iran and that we are likely going to be dealing with lingering effects for a long time.
Cheers,
Paul