Prolonged conflict between Russia and Ukraine could have deleterious effects on the bottom line for major insurers, writes DBRS Morningstar in a new note.
The current conflict, aligned with increased inflation, could lead to insurers being squeezed by claims, while unable to pass on costs to customers, wrote Tomasz Walkowicz and Marcos Alvarez, the respective vice president and senior vice president and head of insurance for the global financial institutions group at the company.
Walkowicz and Alvarez wrote: “[A] prolonged conflict between the West and Russia with substantial sanctions remaining in place, European property and casualty (P&C) insurers could also be negatively affected over the medium term, in DBRS Morningstar’s view. In such a scenario, inflation could persist at relatively high levels while the European economy could be exposed to a slowdown.”
They added: “As a result, P&C insurers could face inflationary pressure on claims across some of their key product lines, such as auto and home insurance. At the same time, they could struggle to pass higher claim costs to customers through premium hikes, resulting in margin squeeze.”
At the present moment, wrote Walkowicz and Alvarez, the appetites of customers for risk in index and unit-linked products has been reduced due to the ‘substantial volatility’ in the financial markets.
Despite the financial tumult caused by Russia’s invasion of Ukraine, DBRS Morningstar said it believed that it would not impact the solvency positions or financial results for insurers this year.
DBRS Morningstar wrote: “We believe that the fall in the equity markets observed since the invasion started should not have a strong impact on the solvency position and the financial results for 2022, given relatively low exposures to equities in insurers’ investment portfolios. However, we see a risk that an extended economic weakness could lead to a deterioration in the quality of insurers’ bond holdings, which represent a much more significant share of European insurers’ investment assets. This in turn could have an adverse impact on European insurers’ solvency in the medium term.”
The company also take the view that the lines most likely to be affected will be cyber or aviation, a subject that Reinsurance News has touched on in recent days, with Berenberg referring recently to the country’s nationalisation of planes as largest risk to the London market.
That assessment above was echoed by Bank of America, who said that the main issue for aviation lines centres on the 500-plus aircraft stranded in Russia because of sanctions arising from the country’s invasion of Ukraine. The planes, valued at over $10bn, could lead to a surfeit of claims for the insurance industry, likely leading to litigation on whether the sanctions voided insurance coverage.
Bank of America wrote: “[…] if the sanctions didn’t void the cover, the insurers often have an ability to pull coverage for specific regions in the event of war for aviation policies. For aviation contingent war covers (policies issued to leasing companies, rather than airlines) there tends to be a 7-day cancellation notice period.”
It added: “According to industry press, notices have generally been sent since the 24th of February up to about a week ago, suggesting that any contingent war covers that can be pulled might have expired by now. For the contingent all-risk covers (issued to leasing companies, with war exclusions) the notice period is typically 30 days. Therefore even if policies have been notified the cover will exist for another couple of weeks.”
