According to Moody’s, the economic consequences of Russia’s invasion of Ukraine creates new risks for global insurers and asset managers, with the impact of the crisis depending on its severity.
Moody’s has created its own baseline scenario, which resulted in the G20 economies’ GDP growth slowing to 3.6% in 2022, compared with the company’s initial forecast of 4.3%.
The hypothetical downside scenario assumes a halt in European imports of Russian oil and gas, a liquidity squeeze, and a widespread recession.
The effect on insurers’ credit quality is low to moderate under Moody’s baseline scenario, but some sub-sectors are more vulnerable to the downside scenario.
Baseline scenario risks for asset managers, including market volatility, are low to moderate.
P&C insurers are most exposed to commodity-driven inflation, and in Moody’s scenario, persistently high inflation would increase property & casualty (P&C) insurers’ claims, eroding their earnings.
According to Moody’s, retail P&C insurers are particularly vulnerable, because competition and regulatory scrutiny hinder their ability to substantially raise premiums. Higher inflation also increases reserve deficiency risk, especially for casualty insurers and reinsurers.
In the company’s downside scenario, trade credit insurers, which cover sellers against the risk of nonpayment, would face falling revenues and higher claims as business disruption reduces trade flows.
Trade credit insurers have little direct exposure to central and eastern Europe, but reduced supplies of Russian and Ukrainian commodities could interrupt supply chains globally.
Aviation re/insurers face claims of up to $11 billion from aircraft lessors whose airplanes have been impounded by Russian airlines.
Insurers and asset managers face earnings pressure from higher market volatility. In the downside scenario, volatility in credit spreads and equity prices would erode investment returns for both insurers and asset managers.
Asian insurers are exposed to foreign exchange risk because of their dollar investments, and European insurers’ solvency ratios are sensitive to market movements.
Cyberattacks are a key security risk, and the Ukraine crisis increases the risk of them for all financial institutions, with European and North American entities whose governments have sanctioned Russia among the potential targets.
Cyber insurance is still a niche product, but insurers may have indirect cyber exposure through their business interruption coverage.
The Ukraine conflict has triggered a sharp rise in energy and commodity prices, which is feeding through into higher inflation. Prolonged high inflation increases insurers’ claims costs because it pushes up the cost of property and vehicle repairs, affecting a broad range of insurance lines, including commercial property, aviation, homeowners and motor.
In Moody’s downside scenario, protracted inflation would add to property and casualty (P&C) insurers’ claims costs, putting pressure on earnings and possibly also on claims reserves.
The retail P&C sector, where tough competition and regulatory scrutiny make it harder for insurers to push through offsetting price increases, is particularly vulnerable.
In this scenario, a sustained rise in claims expenses would likely force some insurers to strengthen their claims reserves. Insurers with long duration liabilities, typically casualty insurers and reinsurers, are most exposed because there is a long time gap between when the premium is received and the claim is paid.
More widespread inflationary pressure, affecting employee wages as well as commodity and energy prices, would expose insurers to higher liability loss costs, and would also push up their own payroll expenses.
More positively, higher inflation will prompt further interest rate tightening by central banks, which would increase insurers’ investment income. Additionally, higher fuel costs could reduce car usage, leading to lower accident frequency and reducing claims volumes.
Similarly, rising agricultural commodity prices could be positive for agricultural insurers in China. This is because rising crop prices may encourage the government to increase domestic food production, and to provide farmers with incentives to use agricultural insurance, with a positive effect on premiums.
Inflation is a low risk for asset managers globally. While inflation is likely to be accompanied by higher interest rates, adversely affecting equity and bond valuations, asset managers’ low balance sheet risk and strong liquidity would give the sector a good degree of protection.
