Analysts at KBRA have warned that insurance and reinsurance companies globally are set to “feel the pain” of Russia’s invasion of Ukraine and its resulting sanctions, with many firms likely to experience “material negative consequences.”
Although policy terms and conditions are not uniform, KBRA expects re/insurers to incorporate coverage exclusions for claims involving violation of economic sanctions and acts of war.
These provisions should limit liability for re/insurers in some lines such as energy and marine, but other coverages, such as trade credit and political risk, typically do not contain these exclusions.
Higher claims may also arise from other lines such as cyber, as the war in Ukraine has significantly changed the future cyber threat landscape, analysts cautioned.
“While (re)insurers with eastern Europe exposure are more directly exposed to cyber claims, allies of Ukraine, as well as companies that cut ties with Russia, could become exposed in a scenario where sanctions against Russia are exhausted and the war shifts to cyberspace,” KBRA said in a new report.
“Regardless of the line of business, ambiguous wordings may generate some litigation and associated costs for (re)insurers,” it added.
However, despite Russia’s prominence as a leading global producer of energy and commodities, its economy is relatively small, meaning overall direct exposure to Russia and Ukraine is low for most re/insurers.
For the large global firms, direct exposure represents a relatively small proportion of their overall insurance liabilities, but KBRA notes that the growing pressure to withdraw from providing insurance to Russia’s fossil fuel industry could provide additional pain for many.
“While no (re)insurer has yet voluntarily ceased underwriting Russian oil and gas exposures, energy bans may force such an outcome,” analysts explained. “However, avoiding a more proactive stance on the war’s humanitarian crisis may cause reputational damage to the insurance industry over the medium term. Moreover, a protracted and intensified conflict may cause unpredictable ripple effects across other business lines and domiciles.”
Additionally, the impact on the global economy, still in recovery from the pandemic, will drive further financial pressures, with inflation already accelerating due to supply-chain disruptions.
Equity and fixed income markets have also become highly volatile, which will drive incremental changes in how re/insurers manage their investments, particularly for entities with exposure to longer-tailed liabilities and spread-based businesses.
“(Re)insurance asset managers will need to maintain liquidity as a defensive measure to protect balance sheets, as well as capitalize on temporary market inefficiencies to boost returns,” KBRA advised.
“Against this backdrop, central banks, in an effort to calm markets, may be slower to raise interest rates over the near to medium term, creating further investment income headwinds for the industry. With this continued market uncertainty, dynamic risk management has never been more critical.”
