Financial market volatility and inflation main threats to insurers from Ukraine crisis

Financial market volatility as a result of the Russia-Ukraine war is more of a threat to the European insurance sector than direct effects from sanctions on Russian entities or other measures restricting Russian business, according to Fitch Ratings. The ratings agency said European insurers and reinsurers have little direct Russian exposure in their insurance books and investment portfolios, and negligible Belarusian and Ukrainian exposure. “However, volatility in global financial markets caused by the conflict could affect their capital ratios. Moreover, the conflict raises the prospect of even higher inflation, which could lead to pressure on profitability, particularly for non-life insurance,” it warned. Fitch said most European insurers and reinsurers have strong capital relative to their ratings, but a sustained downturn in financial markets would erode their capital headroom and could put pressure on some ratings. And high inflation is already pushing up non-life insurance claims costs and leading to margin pressure in short-tail lines, due to rising repair costs for buildings and vehicles. Fitch said insurers may be able to increase premiums accordingly but if high inflation persists, reserve deficiencies could arise on long-tail lines. Fitch noted that international involvement in the Russian insurance market has been limited, particularly since Russia’s invasion of the Crimean peninsula in 2014, which led to global reinsurers withdrawing much of their coverage. “We estimate that global reinsurers’ coverage of risks in Russia typically accounts for less than 2% of their gross written premiums (GWP). The exposure is mostly from specialty lines, such as energy, marine and aviation, typically written through Lloyd’s of London syndicates,” said Fitch. It pointed out that Lloyd’s has said that less than 1% of the business it transacts relates to Russia or Belarus, adding that global reinsurers also have exposure through standard reinsurance treaties, but these typically contain war exclusions. Although several European composite insurers have small Russian subsidiaries or minority stakes in Russian insurers, Fitch estimates that Russian insurance exposure accounts for less than 2% of the groups’ GWP, and that Russian investments account for less than 2% of their total investments. Some companies’ earnings could be materially affected by indirect underwriting exposure, although Fitch said this is harder to quantify. On the claims side, Fitch expects the conflict to lead to claims from trade credit, surety and political risk insurance, bought by corporate clients that do business in Russia, Belarus and Ukraine. While individual claims could be large and subject to legal disputes, most insurers’ aggregate losses should be modest relative to their overall revenue and capital, said the agency. Cyberattacks have increased since the invasion, which could lead to a rise in cyber insurance claims due to business interruption and data leakages, but Fitch thinks rating actions tied to cyber underwriting losses are unlikely. It added that cyberattacks linked to the conflict may test the effectiveness of war exclusion and hostile act exclusion language that many cyber insurance contracts contain.

Financial market volatility and inflation main threats to insurers from Ukraine crisis

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