Most of the areas that are being closely watched for the emergence of claims are niche, specialist lines that are heavily concentrated in the London market and, in particular, in Lloyd’s. To date, the Russia-Ukraine war has brought a more limited uptick in cyber attacks than many had expected, although this is a clear area of concern.
Russia is the 11th biggest economy in the world, but it is not a major marketplace for US P&C insurers, pointing to a relatively muted impact on top lines as they walk away from internationally placed business that will be caught up in sanctions. Interpreting and complying with sanctions will create work for US insurers with such exposures, but Iranian sanctions have given them a dry run.
The economic warfare between Russia and the West that has accompanied the Ukraine war will have significant indirect impacts on the world economy, and extend a period of macroeconomic volatility.
The conflict will exacerbate inflation, increasing the likelihood of a wage-prices spiral and putting pressure on the insurance industry’s own cost base, as well as further disrupting supply chains already struggling to respond to the pandemic.
Alongside this, it has further unsettled already nervous financial markets, driving stock markets that have already struggled since December 2021 lower. US government bond yields, meanwhile, are again falling as investors seek safe haven assets having reverted to something closer to the pre-pandemic “normal” ahead of war.
Commercial lines insurers and brokers are relatively well placed to withstand the challenges, aided by cyclical tailwinds, but personal lines insurers may be hurt again by loss-cost pressures.
Loss costs: Insurance claims will skew to Lloyd’s
With the conflict still live, and its duration and the degree of damage highly uncertain, it is challenging to give any credible indication of the likely size of the insured loss. Worst-case scenarios are likely to be many, many times larger than best-case scenarios.
The lines of business that will absorb most of the loss are all niche, specialty lines.
With Vladimir Putin’s threat to nationalize the fleets of planes leased by Russian airlines, the biggest single area of exposure is aviation war. Sister title Insurance Insider will publish later on the complex detail of this situation including the argument that the sanctions effectively dissolve the cover, but at minimum there is clearly shape for this to develop as an unholy mess of claims disputes and potential litigation.
The political violence market also has meaningful exposure, with sources estimating roughly 30%-50% of terrorism policies in Ukraine have war cover included. Hiscox identified this as its biggest expected area of loss.
The political risk market has exposure for assets and projects it insures across Russia and Ukraine, with market sources estimating low-to-mid-single-digit billion dollars of collective exposure, which lacks war exclusions.
This market has proved highly adept in recent years at avoiding losses through restructuring payment terms to prevent debt defaults, including through the pandemic, such that exposure has rarely materialized into material losses – but this will be freshly tested in a sanctions-hit economy.
The niche marine war market is another area of concern, with a string of vessels including Yasa Jupiter, Millennial Spirit, Namura Queen, and Banglar Samriddhi known to have been at least partially damaged.
These areas of direct loss exposure are all highly concentrated in the London market, with a skew to Lloyd’s. Some of the large US P&C players do play in these areas through their London operations, including Chubb through Chubb Global Markets, Liberty through Liberty Specialty Markets and AIG through Talbot, and some of the Bermudians will also have exposure.
But much of the exposures sit with independent Lloyd’s players or those attached to international groups like Chaucer, Beazley, Hamilton, QBE and Tokio Marine Kiln.
An additional wildcard around these losses will be how claims are treated in instances where sanctioned entities are involved. In some instances, this may result in the cancellation of cover, while it could also under certain circumstances involve funds being held in escrow.
A greater area of concern for the US P&C market is the potential for a fresh step change in the number of cyber attacks.
To date, broader coverage of the conflict seems to suggest that cyber warfare has been a dog that has not barked, with expectations that Russia would shut down the national grid and close down telecommunications in Ukraine proving unfounded.
Nevertheless, with state-sponsored hacking believed to be an important driver of loss activity, and western sanctions more severe than expected, there are fears retaliation through cyber warfare could drive already elevated losses higher. The biggest US cyber insurers are Chubb, Axa XL, AIG and Travelers.
Complying with sanctions: An operational headache more than a top-line hit
The willingness of Western companies to incur significant financial loss to ensure that they do not risk the ire of their home governments has been most dramatically illustrated by BP, which has indicated it will exit its Rosneft stake, opening it up to a write-down of as much as $25bn.
Russia is not a major market for US insurers, with on-shore and direct involvement from international insurers typically coming from European companies like Allianz and Generali.
It seems likely that overseas insurance of large Russian firms will be cancelled to ensure sanctions compliance, creating a small top-line hit to players that participate on globally placed P&C, professional lines and specialty programs.
The loss of a multi-hundred-million slug of premium income to the London energy market from Russian treaties is the most obvious place that this will show up.
Sanctions compliance will create an operational headache for insurers as there are always gray areas around which companies are caught in the net.
The global brokers – Marsh McLennan, Aon and WTW – probably have the most risk around sanctions compliance, as they are the most prominent names and have the most to lose. But equally, they also tend to have incredibly stringent controls to mitigate this risk.
Sources have said that the comprehensive sanctions against Iran have provided the market with a template to follow for Russia, reducing the chance of mistakes.
Indirect impacts: Inflation, stock market volatility and lower bond yields
The bigger impacts for the US P&C market appear to be indirect. The sector was already suffering amid a late-stage pandemic economy, with inflation stoked by an imbalance of supply and demand around goods, as well as a shortage of labor.
A semi-conductor shortage has exacerbated these issues in the auto sector, making personal auto writers the most heavily impacted part of the market. However, building materials shortages and increased labor costs have also triggered loss-cost inflation in homeowners and to a lesser degree commercial property.
Sanctions against Russia have scope to further impact the auto industry, with palladium – a key material in the production of catalytic converters – a major Russian export. The price of palladium has spiked since the conflict, and is up 53% over the last month and 36% over the last week.
Inflation has already been running out of control in the US, with CPI hitting 7.5% in January, and wage inflation running in excess of 5%.
Headline inflation rates are likely to be driven still higher by the impact of increased energy prices, with a growing likelihood that the west will ban Russian oil sending the oil price soaring this morning.
The benchmark Brent crude price soared more than 10% this morning and came close to all-time highs as it briefly opped $130.
Further pressure on prices from this spike could help to stoke a wage-price spiral, which could result in a protracted period of elevated inflation, hurting the sector via its own cost base, and by baking in higher loss cost inflation.
Global equities markets have been heavily impacted by the crisis, extending a challenging year following a correction driven by expectations that central banks would move more quickly than expected to raise interest rates.
Insurers have held up relatively well under the pressure, particularly in commercial lines, reflecting positive sector developments and the sector’s defensive status.
The sector will also be impacted by the flight to safe haven investments, which seems to be reversing the normalization of bond yields that had been underway through 2021 and into early 2022.
Having climbed from a yield of under 1% at the end of 2020 back to 2.05% in late February, the yield on 10-year Treasury notes has gone into reverse, and is currently at 1.74%. The sector is a long-term beneficiary of higher yields, although there is noise short-term from hits to book value from unrealized bond losses.
The outlook for interest rate rises from the Fed now looks more uncertain, as it will have to weigh the need to tame inflation with fears of stagflation if already slowing growth is heavily impacted.
The P&C sector tends to be a fairly safe port in a storm, and right now commercial lines and brokers have strong tailwinds from the cycle to help offset the growing macroeconomic challenge.
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