The Cost of Ukraine and the Impact on (Re)insurers
Insurance companies and claims teams are used to dealing with catastrophes and helping with the clean-up costs associated with the destruction that follows, but the human costs are often difficult to assimilate. The situation in Ukraine is devasting and everyone in the London insurance market, including the people at DOCOsoft, will be hoping for a swift resolution to the conflict. The losses are mounting and that has major implications for (re)insurers and their claims teams. It also will have legal, regulatory and compliance ramifications, particularly on the sanctions front.
The UK Government has imposed comprehensive sanctions covering Russian elites, companies and financial institutions announced following Russia’s full-scale invasion of Ukraine, which has been noted by insurers and reinsurers. Hundreds of companies and oligarchs at the heart of Putin’s regime have now been hit with sanctions worth 100s of billions of pounds, asset freezes and travel bans.
The sanctions also ban Russia’s economically vital industries and companies from raising finance on the UK’s money markets – the most important financial centre in Europe. They stop Russian banks, state, and privately-owned companies borrowing billions of pounds from UK lenders.
Trade credit insurers should expect an inflow of credit default claims from companies supplying goods or services on credit to Russian clients, according to investment firm DBRS Morningstar. The research firm recently released commentary on the trade credit insurance market. While insurers’ exposure to companies exporting to Ukraine is likely to be covered by war exclusions, this will not necessarily be the case for Russian companies because the conflict is not taking place within its borders.
The risk of credit defaults has been heightened by the barrage of financial sanctions imposed on Russian companies. These sanctions include exclusion from the international payment mechanism Swift, a move that will elevate the risk of default if companies cannot execute international financial transactions, according to Morningstar.
This is likely to lead to many insurers and reinsurers exiting the Russian market to limit their exposure. German insurer Allianz SE, for example announced recently that it would no longer write any Russian business.
The trade credit insurance sector is dominated by three players – Euler Hermes, Atradius and Coface – which together account for 85% of the global market. It is these three that “may have to pay out significant claims in the coming months as the conflict persists.”
A Capital Event?
The deeper repercussions on financial markets and inflation from the Russia-Ukraine conflict could potentially shift the outcome from earnings to a capital event, Fitch Ratings’ director of EMEA insurance Robert Mazzuoli told The Insurer TV. Mazzuoli also warned that if the conflict “widens geographically” the result could be “really negative” for the (re)insurance industry.
Speaking to The Insurer TV on the direct and indirect implications of the conflict for the industry, Mazzuoli said the financial market turmoil it has created is likely to have more of an impact on (re)insurers and ratings than sanctions, which to date – while still substantial – have been manageable from a loss perspective. For Mazzuoli, it’s the economic turmoil, inflation, and consequent claims inflation the industry should be wary of. As it currently stands, Fitch expects the conflict to remain an earnings event for the industry, meaning the impact to the ratings from the conflict will be neutral, but headwinds should be monitored carefully.
In addition, cyber insurers could face scrutiny over the wordings across their policies as clauses could be contested.
“The question now arises, how can we prove whether a war has been the cause of cyber-attacks and therefore cyber claims? This is why the wording will be tested,” Mazzuoli added.
The country of origin of cyber-attacks, who the threat actors are, or simply if the attacks are indeed linked to the war, are questions likely to test the strength of cyber insurers’ policy wordings.
In our next blog on the impact of Ukraine, we look at the impact on Lloyd’s war and cyber markets.