Sanctions following Russia’s invasion of Ukraine may impact international insurers and reinsurers’ ability to underwrite Russian risks or make it difficult for them to service claims on existing policies, said a Feb. 25 commentary from global credit rating agency AM Best.
While the situation is fluid, the commentary noted those writing large energy and infrastructure risks, such as London Market insurers and international reinsurers, will be the most affected.
“There may also be recovery implications for foreign insurers that have reinsurance with Russian carriers,” the commentary said.
The sanctions’ economic impacts will add to inflationary pressures by hiking global commodity prices and hampering central banks’ ability to respond to inflation. Bond spreads have been widening as equity markets have become volatile, which puts pressure on insurers’ balance sheets.
“Carriers that depend on hedging to manage their exposures could experience high hedging costs,” according to AM Best.
A Morningstar analysis noted recent developments could stoke near-term equity market volatility – particularly since markets had already priced-in tighter monetary policy and higher interest rates.
“We expect that stocks will remain volatile in the short term, with brief selloffs if further escalation arises, or a snap-back rally if cooler heads prevail,” said Dave Sekera, Morningstar’s chief U.S. market strategist.
Still, he added, the firm doesn’t think “heightened sanctions by themselves would meaningfully impact the long-term earnings potential of U.S. companies.”
If the conflict escalates, AM Best said, the risk of cyber attacks that cause substantial losses will increase. “Heightened risk perception could lead to higher prices in an already hardening cyber market,” the commentary said.
Since the Feb. 24 invasion, countries worldwide have ratcheted up sanctions and it’s predicted there may be more to come.
“Sanctions will affect the balance sheets of Russian insurers and their relationships with international partners,” said AM Best.
What’s more, higher-than-anticipated inflation would impact claims costs and potentially impact the adequacy of reserves.
“Any restrictions on the availability of international reinsurance capacity would lead to higher concentration of risks in the country, particularly large energy and infrastructure risks,” it said.
A.M. Best also noted a withdrawal of international reinsurance capacity would spark increased involvement by the Russian National Reinsurance Company, which was set up in 2016 to provide capacity for insurers subject to foreign sanctions.