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Financial volatility from Russia conflict poses minimal risk to insurers: experts

28th March 2022 - Author: Matt Sheehan

During a recent panel hosted by the Insurance Information Institute (IIS), experts agreed that the possibility of a protracted period of high volatility poses only a minimal risk to the global insurance and reinsurance industries.

Panellists used the discussion to explore the various potential impacts of Russia’s invasion of Ukraine on the global economy, and what the potential implications for insurers might be.

They suggested that the war and its resulting sanctions will surely slow global economic growth and result in higher levels of inflation – an outcome that has been dubbed a ‘stagflationary’ scenario.

The changing economic landscape will likewise almost certainly have an impact on re/insurers, with inflation set to affect both side of the balance sheet for insurers.

But panellists also argued that the industry will likely weather any periods of volatility with relative ease, as they have done in the recent past.

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Addressing potential concerns around a period of prolonged volatility, Ken Mungan, Chairman at Milliman, said he was “not seeing anything negative” for insurers in the longer-term.

“The insurance industry now has been been through this over and over again,” Mungan noted. “There was the global financial crisis. They went through that and restructured the way they dealt with market volatility. They went through the US government debt downgrade in 2011. They’ve gone through COVID, another period of intense volatility,” he continued.

“In effect, what I’m seeing is that the insurance companies took out their extreme market volatility playbook. The playbook is very well refined at this point. They went through, they carried out their plans and their plans largely worked.”

“Historically, if past events geopolitical events are anything to go by, the impact on markets tends to be quite short-lived,” concurred Wei Li, Global Chief Investment Strategist at BlackRock

“And actually,” she added, “if you see how quickly the European and US markets have rebounded, the impact has not been long lasting.”

BlackRock’s assumption is that the war in Ukraine will decrease growth in the Euro area by roughly three percentage points, while adding half a percentage point to inflation. For the US economy, the respective figures are 0.5 points and one point.

“Broadly speaking, the risk of stagflation is a lot less in the US, because the country has achieved some sort of energy self sufficiency versus the risk in in Europe,” Li explained.

“Inflation will be here to stay for,” she continued. “I wouldn’t say for a long time, but we are entering a new inflationary regime where inflation levels will be higher than what we got used to pre pandemic banking.”

In terms of direct exposure to the conflict, the experts were also in agreement that insurers would be well-insulated, although European and London Market firms were seen as being comparatively more at risk.

“American exposure to Europe, and to Ukraine specifically, is fairly limited,” said Michel Leonard, Chief Economist and Data Scientist and Head of the Economics and Analytics Department at the IIS.

“The reason is fairly simple,” he explained. “And that is that American businesses do not trade as much with Ukraine as their neighbours on the European continent. As a result of that there is a little less exposure, maybe indirect through some industries in terms of global corporations having global policies, but again, it’s going to be fairly limited.”

However, one area where Leonard did see the potential for escalation and an increase in exposure was cyber risk, which, if leveraged further by Russia, could “very much bring war here in the United States,” Leonard warned.

“That would be significant escalation,” he acknowledged. “But also, that’s the one area where, depending on the contract, there may be exclusions for war or there may be exclusions for state sponsored attacks and so forth.”

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