Moody’s: Russia’s Invasion of Ukraine Creates New Risks for Insurers

The economic consequences of Russia's invasion of Ukraine, according to Moody's, create new risks for global insurers and asset managers, with the severity of the crisis determining the impact.

Source: Reinsurance News | Published on April 7, 2022

Crisis - Russian Flag and Ukrainian Flag

Moody's created its own baseline scenario, which resulted in GDP growth in the G20 economies slowing to 3.6 percent in 2022, down from the company's initial forecast of 4.3 percent.

The worst-case scenario envisions a halt in European imports of Russian oil and gas, a liquidity squeeze, and widespread recession.

Under Moody's baseline scenario, the impact on insurers' credit quality is low to moderate, but some sub-sectors are more vulnerable to the downside scenario.

Asset managers' baseline scenario risks, including market volatility, are low to moderate.

Property and casualty (P&C) insurers are the most vulnerable to commodity-driven inflation, and in Moody's scenario, persistently high inflation would increase P&C insurers' claims, eroding their earnings.

Retail P&C insurers, according to Moody's, are particularly vulnerable because competition and regulatory scrutiny limit their ability to significantly raise premiums. Higher inflation raises the risk of reserve deficiency, particularly for casualty insurers and reinsurers.

In the company's worst-case scenario, trade credit insurers, which protect sellers against nonpayment, would see lower revenues and higher claims as business disruption reduced trade flows.

Trade credit insurers have little direct exposure to Central and Eastern Europe, but decreased supplies of Russian and Ukrainian commodities could disrupt global supply chains.

Aviation re/insurers are facing $11 billion in claims from aircraft lessors whose planes have been impounded by Russian airlines.

Higher market volatility is putting pressure on the earnings of insurers and asset managers. Volatility in credit spreads and equity prices would erode investment returns for both insurers and asset managers in the worst-case scenario.

Because of their dollar investments, Asian insurers are exposed to foreign exchange risk, and European insurers' solvency ratios are sensitive to market movements.

Cyberattacks are a major security risk, and the Ukraine crisis heightens the risk for all financial institutions, with European and North American entities sanctioned by Russia among the potential targets.

Although cyber insurance remains a niche product, insurers may have indirect cyber exposure through business interruption coverage.

The Ukraine conflict has caused a sharp increase in energy and commodity prices, which is feeding into higher inflation. Long-term high inflation raises insurers' claims costs by raising the cost of property and vehicle repairs, affecting a wide range of insurance lines, including commercial property, aviation, homeowners, and motor.

Prolonged inflation, according to Moody's, 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 is particularly vulnerable, as tough competition and regulatory scrutiny make it difficult for insurers to impose offsetting price increases.

In this scenario, a sustained increase in claims expenses would almost certainly compel some insurers to increase their claims reserves. Insurers with long-term liabilities, such as casualty insurers and reinsurers, are particularly vulnerable because there is a long time lag between when the premium is received and when the claim is paid.

More widespread inflationary pressure, affecting both employee wages and commodity and energy prices, would expose insurers to higher liability loss costs while also increasing their own payroll expenses.

More positively, higher inflation will prompt central banks to tighten interest rates further, increasing insurers' investment income. Furthermore, higher fuel costs may reduce car usage, resulting in fewer accidents and lower claim volumes.

Similarly, rising agricultural commodity prices may benefit Chinese agricultural insurers. Rising crop prices may encourage the government to increase domestic food production and provide farmers with incentives to use agricultural insurance, which will have a positive effect on premiums.

Inflation is a low risk for asset managers around the world. While inflation is likely to be accompanied by higher interest rates, which will have a negative impact on equity and bond valuations, asset managers' low balance sheet risk and strong liquidity will provide the sector with some protection.