European insurers could face Ukraine secondary exposures

The Russia-Ukraine war is more likely to affect the European insurance sector through second-order financial market volatility than through direct effects from sanctions on Russian entities or other measures restricting Russian business, Fitch Ratings Inc. says.

European insurers and reinsurers have little direct exposure to Russia and negligible Belarusian and Ukrainian exposure but could face exposures to secondary effects of the Russian invasion of Ukraine including market volatility, higher inflation and cyberattacks, according to a report Thursday from Fitch.

Global reinsurers’ coverage of risks in Russia typically account for less than 2% of gross written premiums as international involvement in the Russian insurance market has waned since Russia invaded the Crimean Peninsula in 2014. While these exposures are mainly in specialty lines such as energy, marine and aviation typically written through Lloyd’s of London syndicates, Lloyd’s says less than 1% of its business relates to Russia or Belarus.

Claims arising from the conflict could include lines such as trade credit, surety and political risk insurance, but these business lines represent only 4%-5% of gross written premium globally, Fitch said, adding that although individual claims could be large and subject to legal disputes, most insurers’ aggregate losses should be modest relative to their overall revenue and capital.

Secondary effects thrown off by the conflict, however, could roil the commercial insurance sector. Given European insurers’ modest Russian exposure, we believe the greater risk to their credit profiles could come from financial market volatility and higher inflation,” Fitch said.

Global financial market volatility brought on by the conflict could hit insurers’ and reinsurers’ capital ratios, Fitch said. Although most European insurers and reinsurers have strong capital relative to their ratings, a sustained downturn in financial markets could erode their “capital headroom” and could put pressure on some ratings.

The conflict could also accelerate inflation, pressuring profitability, notably in property/casualty lines. Inflation is already leading to margin pressure in some coverage lines due to things like rising repair costs for buildings and vehicles.

Cyberattacks on businesses and government agencies also have increased since the invasion, which could lead to a rise in cyber insurance claims including business interruption and data leakages. Cyber insurance accounts for less than 5% of most insurers’ GWP, however, “and the market is skewed to larger, well-capitalized insurers that cede much of the risk to reinsurers with the ability to withstand large catastrophe losses,” Fitch said.

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